<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(A) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party Other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Market Street Fund, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it is determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing statement registration number, or the
form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
<PAGE> 2
IMPORTANT NOTICE FOR MARKET STREET FUND, INC. SHAREHOLDERS
DECEMBER 1, 2000
All Pro Large Cap Growth Portfolio
All Pro Large Cap Value Portfolio
All Pro Small Cap Growth Portfolio
All Pro Small Cap Value Portfolio
Growth Portfolio
Equity 500 Index Portfolio
International Portfolio
Aggressive Growth Portfolio
Managed Portfolio
Bond Portfolio
Money Market Portfolio
Please Vote Immediately!
MARKET STREET FUND, INC. (THE "FUND") WILL HOST A SPECIAL MEETING OF
SHAREHOLDERS ON FRIDAY, JANUARY 12, 2001, AT THE OFFICES OF PROVIDENT MUTUAL
LIFE INSURANCE COMPANY, AT 1000 CHESTERBROOK BOULEVARD, BERWYN, PENNSYLVANIA
19312-1181. THE PURPOSE OF THIS MEETING IS TO VOTE ON SOME IMPORTANT PROPOSALS
AFFECTING THE PORTFOLIOS.
FOR YOUR CONVENIENCE, IN THE NEXT FEW PAGES WE HAVE PROVIDED A BRIEF
OVERVIEW OF THE PROPOSALS ON WHICH YOU WILL VOTE. BEFORE YOU VOTE, WE RECOMMEND
THAT YOU READ THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF THE PROPOSALS.
PROPOSAL OVERVIEW
We are proposing some changes in the Fund for your approval.
WHY? We want to build on the Fund's foundation to modernize and
simplify the Fund's organization and operations and make the Fund more
attractive to you and other investors. We want to do so by making some changes
that could take advantage of certain legal and industry developments. Although
we obviously cannot give you assurances, we believe that our proposals have the
potential of streamlining and enhancing Fund operations with a view to providing
more efficient and effective services for you and other investors. No one can
predict the future, but we believe that our proposals hold the promise of
attracting both new and existing variable contract owners to invest in the Fund,
which could increase the Fund's size and lead to economies of scale.
PROPOSAL 1: REORGANIZATION OF THE FUND INTO A DELAWARE BUSINESS TRUST
We want to reorganize the Fund into a Delaware business trust.
Currently, the Fund is organized as a Maryland corporation.
WHY? This change is to enable the Fund to take advantage of provisions
of Delaware law favorable to mutual funds. The reorganization will not change
your Portfolio's investment objectives or policies (such changes may be approved
by shareholders under the other Proposals). The Fund will also keep the same
directors, officers, and auditors.
<PAGE> 3
PROPOSAL 2: CHANGE THE INVESTMENT APPROACHES OF AND RENAME CERTAIN
PORTFOLIOS AND CHANGE THE INVESTMENT OBJECTIVE OF THE
GROWTH PORTFOLIO
We want the Growth Portfolio to be renamed the "All Pro Broad Equity
Portfolio," the Aggressive Growth Portfolio to be renamed the "Mid Cap Growth
Portfolio," and the Managed Portfolio to be renamed the "Balanced Portfolio" to
reflect the new investment approaches proposed for each of these Portfolios.
WHY? The Growth Portfolio will be renamed the "All Pro Broad Equity
Portfolio" and will invest primarily in equity securities of both larger and
smaller companies included in the Wilshire 5000 Index that the Portfolio's
subadvisers believe offer above-average potential for growth in the future. The
Growth Portfolio will combine a growth style with a value style of investing.
The Managed Portfolio will be renamed the "Balanced Portfolio" and consist of a
bond asset portion and an equity asset portion. The equity asset portion will be
managed using a growth style rather than a value style of investing. In response
to the need for a more diversified group of investment options, the Aggressive
Growth Portfolio will be renamed the "Mid Cap Growth Portfolio" and will consist
of a mid-cap growth asset class rather than the small cap asset class this
Portfolio currently contains. Offering this additional asset class will provide
shareholders a wider choice of investment options.
PROPOSAL 3: A NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND
MARKET STREET INVESTMENT MANAGEMENT COMPANY ("MSIM") FOR
ALL PORTFOLIOS
We want to approve a new investment advisory agreement between the Fund
and MSIM pursuant to which MSIM will serve as investment adviser to the Growth
Portfolio (to be renamed "All Pro Broad Equity Portfolio"), the Aggressive
Growth Portfolio (to be renamed "Mid Cap Growth Portfolio"), the Managed
Portfolio (to be renamed "Balanced Portfolio"), the Bond Portfolio, and the
Money Market Portfolio, thereby replacing Sentinel Advisors Company ("SAC").
MSIM will continue to serve as the investment adviser to the four existing All
Pro Portfolios, the Equity 500 Index Portfolio, and the International Portfolio.
WHY? MSIM will provide the necessary investment advisory services for
the proposed new investment approaches of the Growth, Aggressive Growth, and
Managed Portfolios. The Growth Portfolio, Aggressive Growth Portfolio, Managed
Portfolio, and Bond Portfolio will all be managed using a "manager of managers"
approach intended to obtain superior performance for these Portfolios. Under a
"manager of managers" program, MSIM has selected one or more subadvisers for
each of these Portfolios, will monitor their performance, and, if necessary,
will replace a subadviser with a new one. For various reasons, including MSIM's
experience serving as the "manager of managers" for the existing All Pro
Portfolios, MSIM has been selected as investment adviser. To put into place a
simpler organizational structure for providing investment advisory services, the
Money Market Portfolio will also be managed by MSIM.
The proposed new investment advisory agreement between the Fund and
MSIM also will replace the three current, but separate, investment advisory
agreements between the Fund and MSIM with respect to the four existing All Pro
Portfolios, the Equity 500 Index Portfolio, and the International Portfolio.
PROPOSAL 4: PERMIT MSIM TO ENTER INTO AND MATERIALLY AMEND SUBADVISORY
AGREEMENTS FOR CERTAIN PORTFOLIOS WITHOUT SHAREHOLDER
APPROVAL
We want to permit MSIM, in connection with the Growth, Equity 500
Index, International, Aggressive Growth, Managed, Bond, and Money Market
Portfolios, to enter into and materially amend subadvisory agreements without
subsequent shareholder approval using the same "manager of managers" approach
MSIM currently has in place for the four existing All Pro Portfolios.
<PAGE> 4
WHY? This change would enable the Portfolios to operate more
efficiently because MSIM would be able to change subadvisers without the
expenses and delays associated with obtaining shareholder approval. The
subadvisory agreements would still be subject to Board approval.
<PAGE> 5
MARKET STREET FUND, INC.
103 Bellevue Parkway
Wilmington, Delaware 19809
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 12, 2001
TO OWNERS OF VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS
ISSUED BY PROVIDENT MUTUAL LIFE INSURANCE COMPANY ("PMLIC"), PROVIDENTMUTUAL
LIFE AND ANNUITY COMPANY OF AMERICA ("PLACA"), OR NATIONAL LIFE INSURANCE
COMPANY ("NLIC") ENTITLED TO GIVE VOTING INSTRUCTIONS IN CONNECTION WITH A
SEPARATE ACCOUNT OF PMLIC, PLACA, OR NLIC.
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of the All Pro Large Cap Growth, All Pro Large Cap Value, All Pro
Small Cap Growth, All Pro Small Cap Value, Growth, Equity 500 Index,
International, Aggressive Growth, Managed, Bond, and Money Market Portfolios
(each, a "Portfolio," and collectively, the "Portfolios") of Market Street Fund,
Inc. (the "Fund"), will be held on Friday, January 12, 2001 at 9:00 a.m. Eastern
time, at the offices of Provident Mutual Life Insurance Company, at 1000
Chesterbrook Boulevard, Berwyn, Pennsylvania 19312-1181.
At the Meeting, shareholders of the Portfolios will be asked to vote
on:
1. A proposal to reorganize the Fund into a Delaware business
trust.
2. A proposal to change the investment approaches of and rename
certain Portfolios and to change the investment objective of
the Growth Portfolio.
3. A proposal for a new investment advisory agreement between the
Fund and Market Street Investment Management Company ("MSIM")
for all Portfolios.
4. A proposal to permit MSIM to enter into and materially amend
subadvisory agreements for certain Portfolios without
shareholder approval.
5. Any other business properly brought before the Meeting.
PMLIC, PLACA, NLIC, and certain separate accounts supporting variable
life insurance policies and variable annuity contracts issued by PMLIC, PLACA,
and NLIC, respectively, are the only shareholders of the Portfolios. However,
each of PMLIC, PLACA, and NLIC hereby solicits and agrees to vote the shares of
the applicable Portfolios at the Meeting in accordance with timely instructions
received from owners of variable life insurance policies and variable annuity
contracts ("variable contracts") having contract values allocated to separate
accounts invested in these shares.
As a variable contract owner of record at the close of business on
November 30, 2000, the record date, you have the right to instruct PMLIC, PLACA,
or NLIC, as applicable, as to the manner in which shares of any Portfolio
attributable to your variable contract should be voted. To assist you in giving
your instructions, a Voting Instruction Form is enclosed that reflects the
number of shares of each Portfolio for which you are entitled to give voting
instructions. (There is a separate form for each Portfolio.) In addition, a
Proxy Statement for the Fund is attached to this Notice and describes the
matters to be voted upon at the Meeting or any adjournment(s) thereof. The
annual report for the Fund for the fiscal year ended December 31, 1999,
previously has been mailed to all owners invested in one of the Portfolios as of
March 30, 2000. Copies of the annual report will be furnished without charge
upon request. Such request should be directed to Albert Petruzzelli at Provident
Mutual Life Insurance Company, 1000 Chesterbrook Boulevard, Berwyn, PA
19312-1181, (800) 523-4681, extension 1262.
<PAGE> 6
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING, PLEASE COMPLETE, DATE, AND SIGN THE ENCLOSED VOTING INSTRUCTION FORM(S)
AND RETURN THIS FORM PROMPTLY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
By Order of the Board of Directors
James Bernstein
Secretary
December 1, 2000
<PAGE> 7
MARKET STREET FUND, INC.
103 Bellevue Parkway
Wilmington, Delaware 19809
December 1, 2000
P R O X Y S T A T E M E N T
This Proxy Statement is being furnished on behalf of the Board of
Directors (the "Board") of Market Street Fund, Inc. (the "Fund") by Provident
Mutual Life Insurance Company ("PMLIC"), Providentmutual Life and Annuity
Company of America ("PLACA"), and National Life Insurance Company ("NLIC") to
owners of variable life insurance policies and variable annuity contracts
("variable contracts") issued by PMLIC, PLACA, and NLIC, respectively. Each such
variable contract has a contract value on November 30, 2000, the record date,
allocated to a separate account of PMLIC, PLACA, or NLIC and invested in shares
of the Fund representing an interest in one or more of the Fund's following
investment portfolios: the All Pro Large Cap Growth Portfolio, the All Pro Large
Cap Value Portfolio, the All Pro Small Cap Growth Portfolio, the All Pro Small
Cap Value Portfolio, the Growth Portfolio, the Equity 500 Index Portfolio, the
International Portfolio, the Aggressive Growth Portfolio, the Managed Portfolio,
the Bond Portfolio, and the Money Market Portfolio (each, a "Portfolio," and
collectively, the "Portfolios").
This Proxy Statement is being furnished in connection with the
solicitation of voting instructions as described herein from owners of variable
contracts for use at the Special Meeting of Shareholders (the "Meeting"). The
Meeting will be held on Friday, January 12, 2001, at 9:00 a.m, Eastern time, at
the offices of Provident Mutual Life Insurance Company, 1000 Chesterbrook
Boulevard, Berwyn, Pennsylvania 19312-1181, for the purposes set forth below and
in the accompanying Notice of Special Meeting. The approximate mailing date of
this Proxy Statement and the Voting Instruction Form(s) is December 1, 2000.
The costs of the Meeting, including the solicitation of voting
instructions from the respective owners, will be paid by PMLIC. The solicitation
of instructions will be made primarily by mail by Management Information
Services Corporation. PMLIC also has engaged Georgeson Shareholder
Communications, Inc. to assist in this solicitation.
At the Meeting, shareholders will be asked to vote on:
1. A proposal to reorganize the Fund into a Delaware business
trust.
2. A proposal to change the investment approaches of and rename
certain Portfolios and to change the investment objective of
the Growth Portfolio.
3. A proposal for a new investment advisory agreement between the
Fund and Market Street Investment Management Company ("MSIM")
for all Portfolios.
4. A proposal to permit MSIM to enter into and materially amend
subadvisory agreements for certain Portfolios without
shareholder approval.
5. Any other business properly brought before the Meeting.
<PAGE> 8
GENERAL VOTING INFORMATION
PMLIC, PLACA, and NLIC, and certain separate accounts supporting
variable life insurance policies and variable annuity contracts issued by PMLIC,
PLACA, and NLIC, respectively, are the only shareholders of the Portfolios.
However, each of PMLIC, PLACA, and NLIC hereby solicits and agrees to vote the
shares of the applicable Portfolios at the Meeting in accordance with timely
instructions received from owners of variable contracts having contract values
allocated to separate accounts invested in these shares. All properly executed
Voting Instruction Forms must be received by Management Information Services
Corporation by 5:00 p.m., Eastern time, Thursday, January 11, 2001, at Proxy
Tabulator, P.O. Box 227, Randolph, MA 02368-9816. Each variable contract owner
has the right to instruct PMLIC, PLACA, or NLIC, as applicable, as to the number
of shares (and fractional shares) that, when added together, have an aggregate
value on the record date equal to the value on the record date under that
owner's contract allocated to each separate account holding shares.
PMLIC, PLACA, and NLIC will vote any shares they own and shares
attributable to variable contracts as to which no voting instructions are
received in the same proportion (for, against, or abstain) as those for which
timely instructions are received. In certain circumstances, PMLIC, PLACA, and
NLIC have the right to disregard voting instructions from certain owners. PMLIC,
PLACA, and NLIC do not believe that these circumstances exist with respect to
the matters currently before shareholders.
Owners may revoke previously submitted voting instructions given to
PMLIC, PLACA, or NLIC, as applicable, at any time prior to the Meeting by
notifying PMLIC, PLACA, or NLIC, as applicable, or the Secretary of the Fund, in
writing.
The number of shares of stock in the Portfolio for which an owner may
give voting instructions is equal to the number of shares, or fraction of
shares, held in the account attributable to the variable contract owner as of
the record date. Each share of the Portfolio's outstanding capital stock is
entitled to one vote and fractional votes are counted. Approval of the Proposals
requires the affirmative vote of the lesser of (1) more than 50% of the shares
entitled to be cast, or (2) 67% or more of the shares present at the Meeting, if
the holders of more than 50% of the shares entitled to be cast for the
Portfolios are present in person or by proxy.
The Board has fixed the close of business on November 30, 2000, as the
record date for the determination of shareholders entitled to vote at the
Meeting. All shares for which PMLIC, PLACA, or NLIC, as applicable, timely
receives properly executed voting instructions, and which are not subsequently
revoked prior to the Meeting, will be voted at the Meeting in accordance with
these instructions. The number of shares of capital stock in the Portfolios
outstanding as of the record date was:
PORTFOLIO OUTSTANDING SHARES
--------- ------------------
All Pro Large Cap Growth Portfolio 3,808,090
All Pro Large Cap Value Portfolio 2,858,859
All Pro Small Cap Growth Portfolio 4,163,483
All Pro Small Cap Value Portfolio 2,474,876
Growth Portfolio 15,061,106
Equity 500 Index Portfolio 39,117,251
International Portfolio 6,066,087
Aggressive Growth Portfolio 3,910,380
Managed Portfolio 4,244,902
Bond Portfolio 3,545,934
Money Market Portfolio 115,964,103
To the best knowledge of the Board and PMLIC, PLACA, and NLIC, PMLIC is
the only owner who, as of November 28, 2000, has the right to instruct PMLIC,
PLACA, or NLIC, as applicable, as to 5% or more of the stock of a Portfolio. As
of that date, PMLIC had contributed seed capital equaling
2
<PAGE> 9
approximately 34% of the All Pro Large Cap Value Portfolio, 6% of the All Pro
Small Cap Growth Portfolio, and 16% of the All Pro Small Cap Value Portfolio.
The following table indicates which variable contract owners are
entitled to give voting instructions on each proposal:
<TABLE>
<CAPTION>
PROPOSAL PORTFOLIOS ENTITLED TO VOTE
-------- ---------------------------
<S> <C>
1. Reorganization of Fund into Delaware business trust All Portfolios
2.a. Change investment objective of, change investment Growth Portfolio
approach of, and rename the Growth Portfolio
2.b. Change investment approach of and rename the Aggressive Aggressive Growth Portfolio
Growth Portfolio
2.c. Change investment approach of and rename the Managed Managed Portfolio
Portfolio
3.a. Approve investment advisory agreement between Fund and All Pro Large Cap Growth Portfolio
MSIM for the All Pro Large Cap Growth Portfolio
3.b. Approve investment advisory agreement between Fund and All Pro Large Cap Value Portfolio
MSIM for the All Pro Large Cap Value Portfolio
3.c. Approve investment advisory agreement between Fund and All Pro Small Cap Growth Portfolio
MSIM for the All Pro Small Cap Growth Portfolio
3.d. Approve investment advisory agreement between Fund and All Pro Small Cap Value Portfolio
MSIM for the All Pro Small Cap Value Portfolio
3.e. Approve investment advisory agreement between Fund and Growth Portfolio
MSIM for the Growth Portfolio
3.f. Approve investment advisory agreement between Fund and Equity 500 Index Portfolio
MSIM for the Equity 500 Index Portfolio
3.g. Approve investment advisory agreement between Fund and International Portfolio
MSIM for the International Portfolio
3.h. Approve investment advisory agreement between Fund and Aggressive Growth Portfolio
MSIM for the Aggressive Growth Portfolio
3.i. Approve investment advisory agreement between Fund and Managed Portfolio
MSIM for the Managed Portfolio
3.j. Approve investment advisory agreement between Fund and Bond Portfolio
MSIM for the Bond Portfolio
3.k. Approve investment advisory agreement between Fund and Money Market Portfolio
MSIM for the Money Market Portfolio
4a. Permit MSIM to enter into and materially amend subadvisory Growth Portfolio
agreements for the Growth Portfolio without shareholder approval
4b. Permit MSIM to enter into and materially amend subadvisory Equity 500 Index Portfolio
agreements for the Equity 500 Index Portfolio without
shareholder approval
4c. Permit MSIM to enter into and materially amend subadvisory International Portfolio
agreements for the International Portfolio without shareholder
approval
4d. Permit MSIM to enter into and materially amend subadvisory Aggressive Growth Portfolio
agreements for the Aggressive Growth Portfolio without
shareholder approval
4e. Permit MSIM to enter into and materially amend subadvisory Managed Portfolio
agreements for the Managed Portfolio without shareholder
approval
4f. Permit MSIM to enter into and materially amend subadvisory Bond Portfolio
agreements for the Bond Portfolio without shareholder approval
</TABLE>
3
<PAGE> 10
<TABLE>
<CAPTION>
PROPOSAL PORTFOLIOS ENTITLED TO VOTE
-------- ---------------------------
<S> <C>
4g. Permit MSIM to enter into and materially amend subadvisory Money Market Portfolio
agreements for the Money Market Portfolio without shareholder
approval
</TABLE>
4
<PAGE> 11
THE PROPOSALS
PROPOSAL 1. REORGANIZATION OF THE FUND INTO A DELAWARE BUSINESS TRUST
(ALL PORTFOLIOS)
At meetings of the Board held on April 24, 2000, and November 3, 2000, the
Board approved a plan to reorganize the Fund into a Delaware business trust. THE
PURPOSE OF THE REORGANIZATION IS TO TAKE ADVANTAGE OF THE PROVISIONS OF DELAWARE
LAW THAT ARE FAVORABLE TO MUTUAL FUNDS. To proceed with the reorganization plan,
we need shareholder approval.
A. WHY WE WANT TO REORGANIZE THE FUND
DELAWARE LAW IS FAVORABLE TO MUTUAL FUNDS. We have proposed to reorganize
the Fund as a Delaware business trust because that state's business trust law
contains provisions that are well suited to mutual funds which are the
underlying investments for your variable contracts. The Delaware Business Trust
Act has been specifically drafted to accommodate the unique governance needs of
investment companies and provides that its policy is to give maximum freedom of
contract to the trust instrument of a Delaware business trust. Delaware has
obtained a favorable national reputation for its business laws and business
environment. The Delaware courts, which may be called upon to interpret the
Delaware Business Trust Act, are among the nation's most highly respected and
have an expertise in corporate matters. There is a well-established body of
precedent that may be relevant in deciding issues pertaining to a Delaware
business trust. Under Delaware law, the Board will have the authority, for
example, to amend the governing trust instrument. Additionally, under Delaware
law, the Trustees for the successor Portfolios will have the flexibility to
respond to future business contingencies. For example, the Trustees will have
the power to incorporate the successor trust, to merge or consolidate the
successor trust with another entity, to cause each Portfolio to become a
separate trust, and to change the successor trust's domicile without a
shareholder vote. This flexibility could help to assure that the successor trust
operates under the most advanced form of organization and could reduce the
expense and frequency of future shareholder meetings for non-investment related
issues. The Fund will continue to operate out of its offices at 103 Bellevue
Parkway, Wilmington, Delaware 19809.
B. HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION. The Board has approved a written
Agreement and Plan of Reorganization, Redomestication, and Pro-Rata Distribution
for the Fund, a copy of which is attached to this Proxy Statement as Appendix A.
This document spells out the terms and conditions that will apply to the Fund's
reorganization into a Delaware business trust.
THREE STEPS TO REORGANIZE. In essence, the reorganization will be a
three-step process. The first step has already been taken. We have established a
Delaware business trust especially for the Fund. Prior to the reorganization,
this trust will issue a single share for each Portfolio to an individual who
will vote in order to comply with shareholder approval requirements of the
Investment Company Act of 1940, as amended (the "1940 Act"). Second, if this
proposal is approved, each of these individuals then will redeem his or her
shares of the trust and the Fund will transfer all of the Fund's assets and
liabilities to the trust. As part of this second step, the trust will open an
account for each Fund shareholder. The trust will then credit these accounts
with the exact number of full and fractional shares that each shareholder owned
in the Fund on the reorganization date. And third, we will dissolve the Fund's
Maryland corporate entity.
EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the
reorganization into a Delaware business trust will take place as soon as
feasible after the Fund receives the necessary regulatory approvals and legal
opinions. We think this could be accomplished by January 31, 2001. However, at
any time prior to the reorganization, the Board may decide that it is in the
best interests of the Fund and its shareholders not to go forward with this
project. If that happens, the Fund will continue to operate as it is currently
organized.
5
<PAGE> 12
C. HOW THE REORGANIZATION WILL AFFECT THE FUND
YOUR PORTFOLIO'S INVESTMENT OBJECTIVE, POLICIES, INVESTMENT ADVISERS, AND
FISCAL YEAR WILL NOT CHANGE DUE TO THE REORGANIZATION. These matters may change
as a result of the other proposals made within this proxy statement, but the
reorganization in and of itself will not change any of these matters. We are,
however, asking shareholders to waive, temporarily, any existing investment
restrictions that would otherwise prohibit the reorganization. Your vote in
favor of the reorganization will operate as a temporary waiver of any of these
restrictions.
THE REORGANIZATION WILL HAVE NO IMPACT ON YOUR PORTFOLIO'S SHARE PRICE.
Effecting the reorganization will not cause your Portfolio's share price to go
up or down, and you will own the same number of shares. In this regard, PMLIC
will bear all of the costs of the reorganization. Any declared, but
undistributed, dividends or capital gains for your Portfolio will carry over
after the reorganization.
THE FUND'S EXISTING DIRECTORS WILL BE REELECTED. Federal securities laws
require that at least one-half of the Fund's directors be elected by
shareholders. While the Fund meets this standard now, technically that will not
be true once the Fund reorganizes as a trust. Rather than call another
shareholder meeting to vote on Trustees after the reorganization, we will treat
shareholder approval of this proposal to reorganize the Fund as authorization to
elect the Fund's current Board members to the same positions with the trust.
Following the reorganization, the Trustees will serve until the next election,
or until their terms are for some reason terminated. This approach will avoid
the considerable expense of printing, mailing, and tabulating more proxies after
the reorganization.
The following individuals currently serve as the directors and officers of
the Fund. Following the reorganization, the directors will serve as the trustees
of the Fund.
<TABLE>
<CAPTION>
NAME, AGE, AND AGGREGATE
ADDRESS OF DIRECTORS POSITION HELD PRINCIPAL OCCUPATION COMPENSATION
AND OFFICERS OF FUND WITH FUND DURING PAST 5 YEARS FROM FUND
-------------------- --------- ------------------- ---------
<S> <C> <C> <C>
Mr. Robert W. Kloss* Director Director since April 22, 1998; $ 0
Age 51 President and Chief Executive
1000 Chesterbrook Boulevard Officer ("CEO") of PMLIC since
Berwyn, Pennsylvania November 1, 1994; 1984-1994,
19312-1181 President and CEO of Covenant
Life Insurance Company
Dr. Alan Gart Director Director since March 21, 1985; $15,000
Age 60 1982-Present, President of
978 Warfield Lane Alan Gart, Inc. (a consulting
Huntington Valley, PA 19006 firm); 2000-Present, Professor
of Finance, Indiana University
of Pennsylvania; 1992-1999,
Professor Nova Southeastern
University
Dr. A. Gilbert Heebner Director Director since May 12, 1989; $15,000
Age 73 1999-Present, Professor
2 Etienne, Arbordeau Emeritus of Economics, Eastern
Devon, PA 19333 College; 1987 - 1998,
Distinguished Professor of
Economics, Eastern College
</TABLE>
6
<PAGE> 13
<TABLE>
<CAPTION>
NAME, AGE, AND AGGREGATE
ADDRESS OF DIRECTORS POSITION HELD PRINCIPAL OCCUPATION COMPENSATION
AND OFFICERS OF FUND WITH FUND DURING PAST 5 YEARS FROM FUND
-------------------- --------- ------------------- ---------
<S> <C> <C> <C>
Mr. Leo Slack Director Director since February 11, $15,000
Age 66 1998; Retired since 1996;
4700 White Tail Lane 1964-1996 Vice President,
Sarasota, FL 34238 Combustion Engineers
Corporation
Mr. Edward Stouch Director Director since December 12, $15,000
Age 83 1985; Retired since 1983
216 Grandview Road
Media, PA 19063
Ms. Rosanne Gatta President 1993-Present, Vice President $ 0
Age 45 and Treasurer of PMLIC
1000 Chesterbrook Boulevard
Berwyn, Pennsylvania
19312-1181
Ms. Sarah C. Lange Vice President 2000-Present, Senior Vice $ 0
Age 44 President and Chief Investment
1000 Chesterbrook Boulevard Officer of PMLIC; 1983-1999,
Berwyn, Pennsylvania Vice President for Investments
19312-1181 of PMLIC
Mr. James D. Kestner Vice President 1994-Present, Vice President $ 0
Age 52 for Investments of PMLIC
1000 Chesterbrook Boulevard
Berwyn, Pennsylvania
19312-1181
Mr. Anthony T. Giampietro Treasurer 1990-Present, Assistant $ 0
Age 41 Treasurer of PMLIC
1000 Chesterbrook Boulevard
Berwyn, Pennsylvania
19312-1181
Todd R. Miller Assistant Vice 1990-September 1996, $ 0
Age 43 President, Financial Accountant, PMLIC;
1000 Chesterbrook Boulevard Reporting Officer October 1996-Present,
Berwyn, Pennsylvania Assistant Vice President,
19312-1181 Financial Reporting, PMLIC
James Bernstein, Esq. Compliance Officer, October 1999-Present, $ 0
Age 38 Secretary Assistant General Counsel,
1000 Chesterbrook Boulevard PMLIC; May 1992-1995,
Berwyn, Pennsylvania Associate, JordenBurt;
19312-1181 1996-May 1999, Partner,
JordenBurt
</TABLE>
* "Interested person" of the Fund for 1940 Act purposes.
As of the record date, the officers and directors of the Fund as a group
owned less than 1% of the outstanding shares of the Fund and of each Portfolio.
Each independent director does, however, have an interest in the Fund through
his ownership of a PLACA variable annuity contract. None of the officers or
7
<PAGE> 14
directors has engaged in any material transactions with the Fund, or has been
indebted to the Fund since the beginning of the last fiscal year. Directors who
are not officers or employees of PMLIC are paid a fee, plus actual out of pocket
expenses, by the Fund for each meeting of the Board attended. Total fees
incurred for 1999 were $60,000. Directors and officers of the Fund do not
receive any benefits from the Fund upon retirement, nor does the Fund accrue any
expense for pension or retirement benefits. During the fiscal year ended
December 31, 1999, the board of directors held 5 meetings. All directors
attended all of the meetings.
The Board currently consists of five directors, only one of whom is an
interested person by reason of his affiliation with MSIM. The Board's members
have established an audit committee and a nominating committee for the efficient
governance of the Fund. The basic purpose of the audit committee is to enhance
the quality of the Fund's financial accountability and financial reporting. The
basic purpose of the nominating committee is to help ensure the selection and
the nomination of qualified candidates for independent director membership on
the Board. Shareholders will not be permitted to make recommendations to the
nominating committee. The nominating committee alone will be responsible for
recommending nominees. No committee meetings were held in the last fiscal year
because the committees were formed during the current fiscal year. The members
of each committee were elected at the September 15, 2000 board meeting and both
committees are and will be comprised solely of independent directors.
THE FUND'S EXISTING INDEPENDENT AUDITORS WILL BE RATIFIED. We will treat
shareholder approval of the reorganization also as ratification of the Fund's
existing independent auditors. PricewaterhouseCoopers LLP is the independent
auditor for the Fund. In this role, PricewaterhouseCoopers LLP audits and
certifies the Fund's financial statements. PricewaterhouseCoopers LLP also
reviews the Fund's Annual Reports to Shareholders and its filings with the
Securities and Exchange Commission (the "SEC"). Neither PricewaterhouseCoopers
LLP nor any of its partners have any direct or material indirect financial
interest in the Fund. If you wish to request the attendance of a
PricewaterhouseCoopers LLP representative at the shareholder meeting to make any
statement or answer any questions, you should contact the Fund's Secretary at
1000 Chesterbrook Boulevard, Berwyn, Pennsylvania 19312-1181.
THE REORGANIZATION IS CONDITIONED ON TAX-FREE TREATMENT AT THE FEDERAL
LEVEL. We fully expect that the reorganization will have no federal income tax
consequences for you or the Fund. We will not proceed with the reorganization
until this point is confirmed by an opinion of counsel. Following the
reorganization, from a tax standpoint, the adjusted basis of the Fund shares
will be the same as before. We do not expect you to incur any personal state or
local taxes as a result of the reorganization, but you should consult your own
tax adviser to be sure.
VOTING RIGHTS WILL BE BASED ON THE DOLLAR AMOUNT OF YOUR INVESTMENT. After
the reorganization, your voting rights will become "dollar-based," which is a
different voting rights system than the Fund uses now. Currently, the Fund
provides shareholders with one vote for each share that the shareholders own.
This share-based system treats shareholders equitably so long as all shares of
the Fund have the same share price. However, fairness tends to erode when the
Fund offers more than one series of shares (we often refer to these as
"portfolios") or more than one class of shares. The share prices of a fund's
different portfolios inevitably diverge over time due to their different
investment programs. Similarly, the share prices of a fund's different share
classes, if any, will deviate over time because of their different expense
structures. As a result, when issues are voted at the Fund level, the owners of
lower-priced shares have relatively-greater voting power than the owners of
higher-priced shares. The change to dollar-based voting will ensure that
shareholders' voting rights remain proportionate to their financial interests.
YOUR PORTFOLIO WILL NO LONGER PERMIT, UPON REQUEST, ISSUANCE OF SHARE
CERTIFICATES AND WILL CONVERT ANY OUTSTANDING SHARE CERTIFICATES TO RECORD ENTRY
FORM. In today's financial world, very few shareholders hold share certificates
as physical evidence of their mutual fund investments. Instead, shareholders'
mutual fund holdings are maintained and accounted for as "record entries" on the
fund's computer system. The main problems with share certificates are that:
8
<PAGE> 15
- Share certificates present opportunities for theft, loss, and
fraud, and, therefore, offer less protection to shareholders,
rather than more.
- Share certificates are especially inconvenient -- you must
return your certificates to the fund before your shares can be
redeemed or exchanged.
In light of these disadvantages and the minimal demand for share
certificates, your Fund will stop issuing them after the reorganization.
D. HOW A DELAWARE BUSINESS TRUST COMPARES TO THE FUND'S CURRENT LEGAL
STRUCTURE
The following discussion compares the Maryland law and documents that
currently govern the Fund with the state law and documents that will apply if
the Fund reorganizes as a Delaware business trust. This discussion is not a
comprehensive review of all technical distinctions between the different legal
structures. (You or your attorney would need to review the laws and Fund
documents firsthand for that sort of analysis.) We simply want you to know how
a Delaware business trust compares in certain key areas to a Maryland
corporation, the Fund's current legal structure.
SHAREHOLDER LIABILITY. Shareholders of the Fund (contract owners, PMLIC,
PLACA, and NLIC), whether organized as a Maryland corporation or Delaware
business trust, generally are not personally liable for the Fund's obligations.
DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION. With a Maryland
corporation, directors cannot be held liable for their activities in that role
so long as the directors perform their duties in good faith, prudently, and in
the Fund's best interests. The same is generally true for the trustees of a
Delaware business trust, so long as it is provided for in the Fund's governing
documents. Under each legal structure, the Fund can indemnify its directors from
claims and expenses arising out of their service to the Fund, unless, a director
has acted improperly in a particular matter.
SHAREHOLDER VOTING RIGHTS AND MEETINGS. Under a Fund organized as a
Maryland corporation, shareholders' voting rights currently are based on the
number of shares that the shareholders own. As we explained above, as a Delaware
business trust, the Fund would shift to a dollar-based voting rights system. As
a Maryland corporation, a Fund generally must call a shareholder meeting if one
is requested in writing by investors entitled to cast 25% or more of the Fund's
votes. As a Delaware business trust, the Fund will also adopt a 25% standard.
SHARE CERTIFICATES. Funds organized as Maryland corporations generally
issue share certificates to their investors upon request. Funds organized as
Delaware business trusts are not required to issue share certificates. As
explained above, following the reorganization, the Fund will stop issuing share
certificates and will convert any outstanding certificates to record entry form.
EVALUATION BY THE BOARD
In evaluating the reorganization plan, the Board reviewed materials
relating to the proposed plan, and had the opportunity to ask questions and
request further information regarding the plan. Based on its consideration of
the discussion above and other information that the Board deemed relevant, and
with the advice of independent counsel, the Board unanimously voted to approve
the reorganization into a Delaware business trust.
BOARD OF DIRECTORS' RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE VOTING
INSTRUCTIONS TO VOTE FOR APPROVAL OF THE REORGANIZATION OF THE FUND INTO A
DELAWARE BUSINESS TRUST.
9
<PAGE> 16
PROPOSAL 2. CHANGE INVESTMENT APPROACHES OF AND RENAME CERTAIN PORTFOLIOS
(GROWTH PORTFOLIO, MANAGED PORTFOLIO, AGGRESSIVE GROWTH PORTFOLIO)
AND CHANGE IN INVESTMENT OBJECTIVE OF GROWTH PORTFOLIO
2.a. CHANGE INVESTMENT OBJECTIVE OF, INVESTMENT APPROACH OF, AND RENAME
GROWTH PORTFOLIO
At a meeting of the Board held on November 3, 2000, the Board approved
a change in the investment objective and the investment approach of the Growth
Portfolio and the renaming of this Portfolio as the "All Pro Broad Equity
Portfolio" to reflect that change. Currently, the Growth Portfolio's investment
objective is to achieve intermediate and long-term growth of capital with a
secondary objective of maintaining a reasonable level of income. The Growth
Portfolio invests primarily in common stocks that offer above-average
intermediate and long-term growth potential. The adviser uses a value-oriented
investment strategy. The Board believes that it is in the best interests of the
Fund to provide an investment option that shifts away from a totally
value-oriented investment strategy. The Portfolio's new investment objective
will be to seek long-term capital appreciation. To achieve that objective, the
Portfolio will invest primarily in equity securities of both larger and smaller
companies included in the Wilshire 5000 Index that the Portfolio's subadvisers
believe offer above-average potential for growth in the future. The Portfolio
will instead provide assets with a broad representation of the market by using
four different investment segments: a small cap value portion, a small cap
growth portion, a large cap value portion, and a large cap growth portion.
Subject to receiving the necessary shareholder approval for a manager of
managers approach to investment management, MSIM in its new role as investment
adviser (as discussed below) will allocate investments of each of these four
segments to a separate subadviser in such proportions as it deems appropriate.
The Portfolio will likely incur brokerage commissions, perhaps over a relatively
short period of time, to the extent that the change in investment objective and
investment approach requires the sale of current portfolio securities and
reinvestment of the proceeds. To proceed with the change in investment approach
and investment objective, we need shareholder approval.
2.b. CHANGE INVESTMENT APPROACH OF AND RENAME AGGRESSIVE GROWTH PORTFOLIO
At a meeting of the Board held on November 3, 2000, the Board approved
a change in the investment approach of the Aggressive Growth Portfolio and the
renaming of this Portfolio as the "Mid Cap Growth Portfolio" to reflect that
change. Currently, the Aggressive Growth Portfolio's investment objective is to
achieve a high level of long-term capital appreciation. The Aggressive Growth
Portfolio invests primarily in securities of companies in new or emerging
industries and in securities of small capitalization companies and/or unseasoned
companies. The Aggressive Growth Portfolio will be renamed the "Mid Cap Growth
Portfolio" to reflect a change from investments in securities of small
capitalization companies and/or unseasoned companies to investments in
securities of mid-cap companies. This represents a change in investment
approach. The Board believes that this new asset class will provide an
additional investment option for the Fund. The Fund already has an investment
option for small cap growth in the All Pro Small Cap Growth Portfolio. The Mid
Cap Growth Portfolio will provide the Fund with a more diverse field of
investment options. The Portfolio will likely incur brokerage commissions,
perhaps over a relatively short period of time, to the extent that the change in
investment approach requires the sale of current portfolio securities and
reinvestment of the proceeds. To proceed with the change in investment approach,
we need shareholder approval.
2.c. CHANGE INVESTMENT APPROACH OF AND RENAME MANAGED PORTFOLIO
At a meeting of the Board held on November 3, 2000, the Board approved
a change in the investment approach of the Managed Portfolio and the renaming of
this Portfolio as the "Balanced Portfolio" to reflect that change. Currently,
the Managed Portfolio's investment objective is to achieve as high a level of
long-term total rate of return as is consistent with prudent investment risk.
The Managed Portfolio's assets may invest solely in common stocks, solely in
debt securities, solely in money market instruments, or in a combination of
these types of investments. The Managed Portfolio will be renamed the
10
<PAGE> 17
"Balanced Portfolio." The Balanced Portfolio will have a bond asset portion and
an equity asset portion. The equity portion of the Balanced Portfolio will
implement a growth style of investing rather than the value style currently
used. The Board believes that this shift is in the best interests of the Fund
and that it will provide an investment option that shifts away from a totally
value-oriented investment strategy and, over the long-term, moves toward a
growth-oriented strategy with a manager that has a long-term, established
growth-oriented track record. The Portfolio will likely incur brokerage
commissions, perhaps over a relatively short period of time, to the extent that
the change in investment approach requires the sale of current portfolio
securities and reinvestment of the proceeds. To proceed with the change in
investment approach, we need shareholder approval.
EVALUATION BY THE BOARD
In evaluating the proposed changes, the Board reviewed materials
relating to the changes, and had the opportunity to ask questions and request
further information regarding the changes. Based on its consideration of the
reasons noted above and other information that the Board deemed relevant, and
with the advice of independent counsel, the Board unanimously voted to approve
the changes in investment approach, and the renaming, of the Growth, Managed,
and Aggressive Growth Portfolios, and the change in the investment objective of
the Growth Portfolio. The renaming of the three Portfolios is being submitted to
you as part of your consideration of the change in investment approach for these
Portfolios and the change in investment objective of the Growth Portfolio. The
Board has the authorization on its own to rename the Portfolios.
BOARD OF DIRECTORS' RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE VOTING
INSTRUCTIONS TO VOTE FOR APPROVAL OF THE CHANGES IN INVESTMENT APPROACH AND THE
RENAMING OF THE GROWTH, MANAGED, AND AGGRESSIVE GROWTH PORTFOLIOS, AND THE
CHANGE IN THE INVESTMENT OBJECTIVE OF THE GROWTH PORTFOLIO.
PROPOSAL 3. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR ALL
PORTFOLIOS
On November 30, 2000, SAC gave formal notice of its intent to resign,
on or around January 31, 2001, as investment adviser to the Growth Portfolio,
the Aggressive Growth Portfolio, the Managed Portfolio, the Bond Portfolio, and
the Money Market Portfolio. This reflects a decision by PMLIC, its affiliate,
PLACA, and NLIC, all three of whom are joint participants in the ownership of
SAC, to terminate their joint venture and independently pursue their respective
mutual fund and variable contract businesses.
The Board accepted the resignation and, at a meeting of the Board held
on November 3, 2000, the Board approved an interim investment advisory agreement
between the Fund and MSIM, and seven (7) interim subadvisory agreements between
MSIM and respective subadvisers regarding the Growth Portfolio, the Aggressive
Growth Portfolio, the Managed Portfolio, and the Bond Portfolio. In addition,
pursuant to an advisory agreement between the Fund and MSIM, MSIM will serve as
the investment adviser to each of the eleven (11) Portfolios of the Fund.
Pursuant to the interim subadvisory agreements: (i) Sanford C. Bernstein & Co.,
LLC ("Bernstein"), Alliance Capital Management Corp. ("Alliance"), Husic Capital
Management ("Husic"), and Reams Asset Management Company, LLC ("Reams") will
provide investment advisory services to the Growth Portfolio; (ii) T. Rowe Price
Associates, Inc. ("T. Rowe Price") will provide investment advisory services to
the Aggressive Growth Portfolio; (iii) Fred Alger Management Inc. ("Fred Alger")
will provide investment advisory services to the Managed Portfolio; and (iv)
Western Asset Management Company ("Western Asset") will provide investment
advisory services to the Bond Portfolio. These interim investment advisory and
interim subadvisory agreements will be in effect until no later than May 30,
2001, 150 days after the termination of the agreement between the Fund and SAC,
pending shareholder approval of the new investment advisory agreement. MSIM will
serve pursuant to the interim agreements if SAC is no longer acting under the
current investment advisory agreement and the new investment advisory agreement
with MSIM and the new subadvisory agreements that MSIM will enter into with the
subadvisers have not gone into effect.
11
<PAGE> 18
At the meeting of the Board held on November 3, 2000, the Board also
approved a new investment advisory agreement between the Fund and MSIM for all
of the Fund's Portfolios, including the Growth, Aggressive Growth, Managed,
Bond, and Money Market Portfolios. This new investment advisory agreement will
permit MSIM to implement a "manager of managers" approach to investment
management. As part of the proposed changes in the investment approaches of the
Growth Portfolio, the Aggressive Growth Portfolio, and the Managed Portfolio,
these Portfolios may all be managed using a "manager of managers" approach
intended to obtain superior performance for these Portfolios. The Equity 500
Index Portfolio, the International Portfolio, and the Bond Portfolio will also
be managed using the "manager of managers" approach. The subadvisers that would
be providing advisory services under the interim subadvisory agreements will be
acting as the initial subadvisers under the new investment advisory agreement
between the Fund and MSIM. Due to MSIM's experience working as the "manager of
managers" for the All Pro Portfolios, among other factors, MSIM also was
selected by the Board to serve as the investment adviser. Based on MSIM's prior
experience managing the Money Market Portfolio and on a desire to have a single
investment adviser for the Fund, MSIM was selected to manage the Money Market
Portfolio. The proposed new investment advisory agreement between the Fund and
MSIM also will replace the three current, but separate, investment advisory
agreements between the Fund and MSIM with respect to the All Pro Portfolios, the
Equity 500 Index Portfolio, and the International Portfolio. A copy of this new
investment advisory agreement is attached to this Proxy Statement as Appendix B.
This new investment advisory agreement has been drafted with the Fund identified
as a Delaware business trust based on the assumption that shareholders will
approve the reorganization described in Proposal 1. So that the Fund will not be
without a properly approved investment advisory agreement in the event Proposal
1 is not approved, a vote for the new investment advisory agreement described in
this proposal will be deemed to be a vote for an agreement that is identical to
the new investment advisory agreement except that the Fund will be identified as
a Maryland corporation rather than as a Delaware business trust.
To proceed under the new investment advisory agreement, we need
shareholder approval. If shareholders do not approve the agreement, the Board
will take appropriate action after reviewing the available alternatives,
including, among others, entering into an interim investment advisory agreement
and/or resoliciting shareholder approval.
3.a. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE ALL
PRO LARGE CAP GROWTH PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and new subadvisory agreements between MSIM and Geewax, Terker &
Co. ("Geewax") and MSIM and Alliance for the All Pro Large Cap Growth Portfolio
at a meeting of the Board held on November 3, 2000. The current investment
advisory agreement was initially and last approved by the shareholders on April
29, 1998. The new investment advisory agreement between the Fund and MSIM will
become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
As under the current investment advisory agreement between the Fund and
MSIM, under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the All Pro Large Cap Growth Portfolio, will provide oversight for the
subadvisers that are hired, will negotiate the terms of subadvisory agreements,
and will provide the Fund's directors with regular reports as to the Portfolio's
overall investment plan, schedule of investments and other assets, and recent
purchases and sales by the Portfolio.
12
<PAGE> 19
The All Pro Large Cap Growth Portfolio will continue to be managed
using a "manager of managers" approach by which MSIM allocates the Portfolio's
assets among one or more subadvisers. The implementation of a "manager of
managers" arrangement allows the Portfolio to benefit from the expertise of a
subadviser who specializes in the investment strategies that are intended to
assist the Portfolio in achieving its investment goals. Given MSIM's experience
in operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with this
Portfolio, as well as other Portfolios within the Fund, MSIM was approved by the
Board on November 3, 2000, as the investment adviser to the All Pro Large Cap
Growth Portfolio under the new investment advisory agreement. As part of the
"manager of managers" arrangement, the new investment advisory agreement will
continue to cover MSIM's compensation for its oversight services, as well as the
fees for the subadvisers who will be making the day-to-day investment decisions.
The table on page ___ describes the compensation paid monthly by the Portfolio
to MSIM under both the previous and the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the All Pro Large Cap Growth Portfolio and
Geewax and Alliance will continue to serve as subadvisers for the All Pro Large
Cap Growth Portfolio. Geewax is located at 99 Starr Street, Phoenixville,
Pennsylvania, and provides portfolio management for approximately $8 billion in
assets. Alliance is located at 1345 Avenue of the Americas, New York, New York,
and provides portfolio management for $388 billion in assets.
MSIM has retained Wilshire Associates, Incorporated ("Wilshire") as an
investment management consultant to assist MSIM in identifying and evaluating
the performance of potential subadvisers for the All Pro Large Cap Growth
Portfolio. Wilshire does not participate in the selection of the portfolio
securities for the Portfolio or in any way participate in the day-to-day
management of the Portfolio or the Fund. Wilshire assists MSIM in gathering data
and performing the quantitative analysis necessary to identify the styles and
past performance of potential subadvisers. Wilshire also assists MSIM in
performing similar ongoing quantitative analysis of the performance of the
Portfolio's subadvisers and in determining whether changes in a subadviser would
be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the All Pro
Large Cap Growth Portfolio, upon 60 days' notice given by the Board, by MSIM or
by majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
3.b. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE ALL
PRO LARGE CAP VALUE PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and new subadvisory agreements between MSIM and Mellon Equity
Associates, LLP ("Mellon") and MSIM and Bernstein for the All Pro Large Cap
Value Portfolio at a meeting of the Board held on November 3, 2000. The current
investment advisory agreement was initially and last approved by the
shareholders on April 29, 1998. The new investment advisory agreement between
the Fund and MSIM will become effective upon shareholder approval.
13
<PAGE> 20
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
As under the current investment advisory agreement between the Fund and
MSIM, under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the All Pro Large Cap Value Portfolio, will provide oversight for the
subadvisers that are hired, will negotiate the terms of subadvisory agreements,
and will provide the Fund's directors with regular reports as to the Portfolio's
overall investment plan, schedule of investments and other assets, and recent
purchases and sales by the Portfolio.
The All Pro Large Cap Value Portfolio will continue to be managed using
a "manager of managers" approach by which MSIM allocates the Portfolio's assets
among one or more subadvisers. The implementation of a "manager of managers"
arrangement allows the Portfolio to benefit from the expertise of a subadviser
who specializes in the investment strategies that are intended to assist the
Portfolio in achieving its investment goals. Given MSIM's experience in
operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with this
Portfolio, as well as other Portfolios within the Fund, MSIM was approved by the
Board on November 3, 2000, as the investment adviser to the All Pro Large Cap
Value Portfolio under the new investment advisory agreement. As part of the
"manager of managers" arrangement, the new investment advisory agreement will
continue to cover MSIM's compensation for its oversight services, as well as the
fees for the subadvisers who will be making the day-to-day investment decisions.
The table on page ___ describes the compensation paid monthly by the Portfolio
to MSIM under both the previous and the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the All Pro Large Cap Value Portfolio and
Mellon and Bernstein will continue to serve as subadvisers for the All Pro Large
Cap Value Portfolio. Mellon is located at 500 Grant Street, Suite 4200,
Pittsburgh, Pennsylvania, and provides portfolio management for approximately
$39 billion in assets. Bernstein is located at 767 Fifth Avenue, New York, New
York, and provides portfolio management for approximately $87 billion in assets.
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the All Pro Large Cap Value Portfolio. Wilshire does not
participate in the selection of the portfolio securities for the Portfolio or in
any way participate in the day-to-day management of the Portfolio or the Fund.
Wilshire assists MSIM in gathering data and performing the quantitative analysis
necessary to identify the styles and past performance of potential subadvisers.
Wilshire also assists MSIM in performing similar ongoing quantitative analysis
of the performance of the Portfolio's subadvisers and in determining whether
changes in a subadviser would be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the All Pro
Large Cap Value Portfolio, upon 60 days' notice given by the Board, by MSIM or
by majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
14
<PAGE> 21
3.c. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE ALL
PRO SMALL CAP GROWTH PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and new subadvisory agreements between MSIM and Lee Munder
Investments Ltd. ("Lee Munder") and MSIM and Husic for the All Pro Small Cap
Growth Portfolio at a meeting of the Board held on November 3, 2000. The current
investment advisory agreement was initially and last approved by the
shareholders on April 29, 1998. The new investment advisory agreement between
the Fund and MSIM will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
As under the current investment advisory agreement between the Fund and
MSIM, under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the All Pro Small Cap Growth Portfolio, will provide oversight for the
subadvisers that are hired, will negotiate the terms of subadvisory agreements,
and will provide the Fund's directors with regular reports as to the Portfolio's
overall investment plan, schedule of investments and other assets, and recent
purchases and sales by the Portfolio.
The All Pro Small Cap Growth Portfolio will continue to be managed
using a "manager of managers" approach by which MSIM allocates the Portfolio's
assets among one or more subadvisers. The implementation of a "manager of
managers" arrangement allows the Portfolio to benefit from the expertise of a
subadviser who specializes in the investment strategies that are intended to
assist the Portfolio in achieving its investment goals. Given MSIM's experience
in operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with this
Portfolio, as well as other Portfolios within the Fund, MSIM was approved by the
Board on November 3, 2000, as the investment adviser to the All Pro Small Cap
Growth Portfolio under the new investment advisory agreement. As part of the
"manager of managers" arrangement, the new investment advisory agreement will
continue to cover MSIM's compensation for its oversight services, as well as the
fees for the subadvisers who will be making the day-to-day investment decisions.
The table on page ___ describes the compensation paid monthly by the Portfolio
to MSIM under both the previous and the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the All Pro Small Cap Growth Portfolio and
Lee Munder and Husic will continue to serve as subadvisers for the All Pro Small
Cap Growth Portfolio. Lee Munder is located at 200 Clarendon Street, Boston,
Massachusetts, and provides portfolio management for $400 million in assets.
Husic, located at 555 California Street, Suite 2900, San Francisco, California,
offers products across the market capitalization spectrum and is dedicated to
growth style management. Husic manages more than $4 billion on behalf of
institutions and individuals, including nearly $400 million in its small-cap
growth product.
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the All Pro Small Cap Growth Portfolio. Wilshire does not
participate in the selection of the portfolio securities for the Portfolio or in
any way participate in the day-to-day management of the Portfolio or the Fund.
Wilshire assists MSIM in gathering data and performing the quantitative analysis
necessary to identify the styles and past performance of potential subadvisers.
Wilshire also assists MSIM in performing similar ongoing quantitative analysis
of the performance of the Portfolio's subadvisers and in determining whether
changes in a subadviser would be desirable for the Portfolio.
15
<PAGE> 22
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the All Pro
Small Cap Growth Portfolio, upon 60 days' notice given by the Board, by MSIM or
by majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
3.d. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE ALL
PRO SMALL CAP VALUE PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and new subadvisory agreements between MSIM and Sterling Capital
Management Company ("Sterling") and MSIM and Reams for the All Pro Small Cap
Value Portfolio at a meeting of the Board held on November 3, 2000. The current
investment advisory agreement was initially and last approved by the
shareholders on April 29, 1998. The new investment advisory agreement between
the Fund and MSIM will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
As under the current investment advisory agreement between the Fund and
MSIM, under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the All Pro Small Cap Value Portfolio, will provide oversight for the
subadvisers that are hired, will negotiate the terms of subadvisory agreements,
and will provide the Fund's directors with regular reports as to the Portfolio's
overall investment plan, schedule of investments and other assets, and recent
purchases and sales by the Portfolio.
The All Pro Small Cap Value Portfolio will continue to be managed using
a "manager of managers" approach by which MSIM allocates the Portfolio's assets
among one or more subadvisers. The implementation of a "manager of managers"
arrangement allows the Portfolio to benefit from the expertise of a subadviser
who specializes in the investment strategies that are intended to assist the
Portfolio in achieving its investment goals. Given MSIM's experience in
operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with this
Portfolio, as well as other Portfolios within the Fund, MSIM was approved by the
Board on November 3, 2000, as the investment adviser to the All Pro Small Cap
Value Portfolio under the new investment advisory agreement. As part of the
"manager of managers" arrangement, the new investment advisory agreement will
continue to cover MSIM's compensation for its oversight services, as well as the
fees for the subadvisers who will be making the day-to-day investment decisions.
The table on page ___ describes the compensation paid monthly by the Portfolio
to MSIM under both the previous and the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the All Pro Small Cap Value Portfolio and
Sterling and Reams will continue to serve as subadvisers for the All Pro Small
Cap Value Portfolio. Sterling is located at 301 S. College Street, Suite 3200,
Charlotte, North Carolina, and provides portfolio management for approximately
$3.4 billion in assets. Reams, located at 227 Washington Street, Columbus,
Indiana, provides investment management services primarily to institutional
clients. Reams offers primarily small and small to mid-cap value products for
its clients and has approximately $8 billion in assets under management.
16
<PAGE> 23
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the All Pro Small Cap Value Portfolio. Wilshire does not
participate in the selection of the portfolio securities for the Portfolio or in
any way participate in the day-to-day management of the Portfolio or the Fund.
Wilshire assists MSIM in gathering data and performing the quantitative analysis
necessary to identify the styles and past performance of potential subadvisers.
Wilshire also assists MSIM in performing similar ongoing quantitative analysis
of the performance of the Portfolio's subadvisers and in determining whether
changes in a subadviser would be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the All Pro
Small Cap Value Portfolio, upon 60 days' notice given by the Board, by MSIM or
by majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
3.e. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
GROWTH PORTFOLIO
BACKGROUND INFORMATION
On November 30, 2000, SAC gave formal notice of its intent to resign,
effective on or around January 31, 2001, as investment adviser to the Growth
Portfolio and the Board accepted the resignation. Assuming SAC's resignation
becomes effective, it will terminate the investment advisory agreement between
the Fund and SAC that became effective May 1, 1997. The agreement was last
approved by the shareholders on April 24, 1997, in order to approve the
investment advisory agreement between the Fund and SAC for the Growth Portfolio.
The terms of the previous investment advisory agreement provided that SAC
rendered investment advice to the Portfolio, and managed the investment and
reinvestment of the Portfolio's assets. SAC is located at One National Life
Drive, Montpelier, Vermont 05604.
At a meeting of the Board held on November 3, 2000, the Board,
including a majority of independent trustees, approved an interim investment
advisory agreement between the Fund and MSIM, and an interim subadvisory
agreement between MSIM and each of Bernstein, Alliance, Husic, and Reams for the
Growth Portfolio. The interim investment advisory agreement and the four interim
subadvisory agreements will remain effective for a period of 150 days following
the termination of the previous investment advisory agreement pending
shareholder approval of the new investment advisory agreement. During the
interim period, MSIM will be paid 0.50% of the average daily net assets of the
Growth Portfolio, the same fee that SAC was paid under the previous investment
advisory agreement. Out of this fee, MSIM will then pay Bernstein, Alliance,
Husic, and Reams their respective fees. A new investment advisory agreement
between the Fund and MSIM will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the Growth Portfolio, will provide oversight for the subadvisers that are hired,
will negotiate the terms of subadvisory agreements, and will provide the Fund's
directors with regular reports as to the Growth Portfolio's overall investment
plan, schedule of investments and other assets, and recent purchases and sales
by the Portfolio.
17
<PAGE> 24
The Growth Portfolio will be managed using a "manager of managers"
approach by which MSIM allocates the Portfolio's assets among one or more
subadvisers. The implementation of a "manager of managers" arrangement allows
the Portfolio to benefit from the expertise of a subadviser who specializes in
the investment strategies that are intended to assist the Portfolio in achieving
its investment goals. Given MSIM's experience in operating a "manager of
managers" approach to investment management, in particular in managing multiple
managers, and MSIM's experience with other Portfolios within the Fund, the Board
approved MSIM as the investment adviser to the Growth Portfolio on November 3,
2000. As part of implementing a "manager of managers" arrangement, the new
investment advisory agreement will cover MSIM's compensation for its oversight
services as well as the fees for the subadvisers who will be making the
day-to-day investment decisions. The previous investment advisory agreement with
SAC does not include compensation for the oversight services MSIM will be
performing under the "manager of managers" arrangement. Additionally, the
previous investment advisory agreement generally does not include the
compensation levels necessary to attract the services of qualified and
experienced subadvisers in today's market. As a result, the new investment
advisory agreement provides for higher advisory fees than the previous
investment advisory agreement. The table on page ____ describes the compensation
paid monthly by the Portfolio to MSIM under both the previous and the new
investment advisory agreements.
If the interim agreements go into effect, MSIM will serve as the
investment adviser for the Growth Portfolio, and Bernstein, Alliance, Husic, and
Reams will serve as the subadvisers for the Growth Portfolio. Assuming
shareholder approval of the new investment advisory agreement, Bernstein,
Alliance, Husic, and Reams will then serve as the subadvisers. Bernstein has
expertise in large-cap value management. Bernstein is located at 767 Fifth
Avenue, New York, New York, and provides portfolio management for approximately
$87 billion in assets. Alliance has expertise in large-cap growth management.
Alliance is located at 1345 Avenue of the Americas, New York, New York, and
provides portfolio management for $388 billion in assets. Husic, located at 555
California Street, Suite 2900, San Francisco, California, offers products across
the market capitalization spectrum and is dedicated to growth style management.
Husic manages more than $4 billion on behalf of institutions and individuals
including nearly $400 million in its small-cap growth product. Reams, located at
227 Washington Street, Columbus, Indiana, provides investment management
services primarily to institutional clients. Reams offers primarily small and
small to mid-cap value products for its clients and has approximately $8 billion
in assets under management. These subadvisers will provide investment advisory
services that are intended to result in superior performance for the Growth
Portfolio.
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the Growth Portfolio. Wilshire does not participate in the
selection of the portfolio securities for the Portfolio or in any way
participate in the day-to-day management of the Portfolio or the Fund. Wilshire
assists MSIM in gathering data and performing the quantitative analysis
necessary to identify the styles and past performance of potential subadvisers.
Wilshire also assists MSIM in performing similar ongoing quantitative analysis
of the performance of the Portfolio's subadvisers and in determining whether
changes in a subadviser would be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Growth
Portfolio, upon 60 days' notice given by the Board, by MSIM or by majority vote
of the outstanding shares of the Portfolio, as defined below. Otherwise, the
investment advisory agreement will continue in force with respect to the
Portfolio so long as its continuance is approved at least annually by the Board
or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
18
<PAGE> 25
3.f. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
EQUITY 500 INDEX PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and a new subadvisory agreements between MSIM and State Street
Global Advisors ("State Street") for the Equity 500 Index Portfolio at a meeting
of the Board held on November 3, 2000. The current investment advisory agreement
was initially and last approved by the shareholders on September 23, 1999. The
new investment advisory agreement between the Fund and MSIM will become
effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the Equity 500 Index Portfolio, will provide oversight for the subadvisers that
are hired, will negotiate the terms of subadvisory agreements, and will provide
the Fund's directors with regular reports as to the Portfolio's overall
investment plan, schedule of investments and other assets, and recent purchases
and sales by the Portfolio.
The Equity 500 Index Portfolio may be managed using a "manager of
managers" approach by which MSIM allocates the Portfolio's assets among one or
more subadvisers. The implementation of a "manager of managers" arrangement
allows the Portfolio to benefit from the expertise of a subadviser who
specializes in the investment strategies that are intended to assist the
Portfolio in achieving its investment goals. Given MSIM's experience in
operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with other
Portfolios within the Fund, on November 3, 2000, the Board approved MSIM as the
investment adviser to the Equity 500 Index Portfolio under the new investment
advisory agreement. As part of implementing a "manager of managers" arrangement,
the new investment advisory agreement will cover MSIM's compensation for its
oversight services, as well as the fees for the subadvisers who will be making
the day-to-day investment decisions. The table on page ___ describes the
compensation paid monthly by the Portfolio to MSIM under both the previous and
the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the Equity 500 Index Portfolio and State
Street will continue to serve as the subadviser for the Equity 500 Index
Portfolio. State Street is located at One International Place, Boston,
Massachusetts, and provides portfolio management for approximately $738 million
in assets.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Equity 500
Index Portfolio, upon 60 days' notice given by the Board, by MSIM or by majority
vote of the outstanding shares of the Portfolio, as defined below. Otherwise,
the investment advisory agreement will continue in force with respect to the
Portfolio so long as its continuance is approved at least annually by the Board
or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
19
<PAGE> 26
3.g. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
INTERNATIONAL PORTFOLIO
BACKGROUND INFORMATION
In connection with the reorganization of the Fund into a Delaware
business trust and the implementation of a "manager of managers" arrangement
with respect to all Portfolios of the Fund, the Board, including a majority of
independent trustees, approved a new investment advisory agreement between the
Fund and MSIM and a new subadvisory agreement between MSIM and The Boston
Company Asset Management ("Boston Company") for the International Portfolio at a
meeting of the Board held on November 3, 2000. The current investment advisory
agreement was initially and last approved by the shareholders on July 31, 1991.
The new investment advisory agreement between the Fund and MSIM will become
effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the International Portfolio, will provide oversight for the subadvisers that are
hired, will negotiate the terms of subadvisory agreements, and will provide the
Fund's directors with regular reports as to the Portfolio's overall investment
plan, schedule of investments and other assets, and recent purchases and sales
by the Portfolio.
The International Portfolio may be managed using a "manager of
managers" approach by which MSIM allocates the Portfolio's assets among one or
more subadvisers. The implementation of a "manager of managers" arrangement
allows the Portfolio to benefit from the expertise of a subadviser who
specializes in the investment strategies that are intended to assist the
Portfolio in achieving its investment goals. Given MSIM's experience in
operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with other
Portfolios within the Fund, on November 3, 2000, the Board approved MSIM as the
investment adviser to the International Portfolio under the new investment
advisory agreement. As part of implementing a "manager of managers" arrangement,
the new investment advisory agreement will cover MSIM's compensation for its
oversight services, as well as the fees for the subadvisers who will be making
the day-to-day investment decisions. The table on page ___ describes the
compensation paid monthly by the Portfolio to MSIM under both the previous and
the new investment advisory agreements.
Under the new investment advisory agreement, MSIM will continue to
serve as the investment adviser for the International Portfolio and Boston
Company will continue to serve as the subadviser for the International
Portfolio. Boston Company is located at One Boston Place, Boston, Massachusetts,
and provides portfolio management for approximately $26 billion in assets.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the
International Portfolio, upon 60 days' notice given by the Board, by MSIM or by
majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
20
<PAGE> 27
3.h. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
AGGRESSIVE GROWTH
BACKGROUND INFORMATION
On November 30, 2000, SAC gave formal notice of its intent to resign,
effective on or around January 31, 2001, as investment adviser to the
Aggressive Growth Portfolio, and the Board accepted the resignation. Assuming
SAC's resignation becomes effective, it will terminate the investment advisory
agreement between the Fund and SAC that became effective March 1, 1993. The
investment advisory agreement was last approved by shareholders on April 25,
1996, in connection with an amendment authorizing SAC to provide advisory
services to the Money Market Portfolio. The terms of the previous investment
advisory agreement provided that SAC rendered investment advice to the
Aggressive Growth Portfolio, and managed the investment and reinvestment of the
Portfolio's assets. SAC is located at One National Life Drive, Montpelier,
Vermont 05604.
At a meeting of the Board held on November 3, 2000, the Board,
including a majority of independent trustees, approved an interim investment
advisory agreement between the Fund and MSIM, and an interim subadvisory
agreement between MSIM and T. Rowe Price for the Aggressive Growth Portfolio.
The interim investment advisory and subadvisory agreements will remain effective
for a period of 150 days following the termination of the previous investment
advisory agreement pending shareholder approval of the new investment advisory
agreement. During the interim period, MSIM will be paid 0.50% of the average
daily net assets of the Aggressive Growth Portfolio, the same fee that SAC was
paid under the previous investment advisory agreement. Out of this fee, MSIM
will then pay T. Rowe Price its fee. A new investment advisory agreement between
the Fund and MSIM will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers,
will provide oversight for the subadvisers that are hired, will negotiate the
terms of subadvisory agreements, and will provide the Fund's directors with
regular reports as to the Aggressive Growth Portfolio's overall investment plan,
schedule of investments and other assets, and recent purchases and sales by the
Portfolio.
The Aggressive Growth Portfolio may be managed using a "manager of
managers" approach by which MSIM allocates the Portfolio's assets among one or
more subadvisers. The implementation of a "manager of managers" arrangement
allows the Portfolio to benefit from the expertise of a subadviser who
specializes in the investment strategies that are intended to assist the
Portfolio in achieving its investment goals. Given MSIM's experience in
operating a "manager of managers" approach to investment management, in
particular in managing multiple managers, and MSIM's experience with other
Portfolios within the Fund, the Board approved MSIM as the investment adviser to
the Aggressive Growth Portfolio on November 3, 2000. As part of implementing a
"manager of managers" arrangement, the new investment advisory agreement will
cover MSIM's compensation for its oversight services as well as the fees for the
subadvisers who will be making the day-to-day investment decisions. The previous
investment advisory agreement with SAC does not include compensation for the
oversight services MSIM will be performing under the "manager of managers"
arrangement. Additionally, the previous investment advisory agreement generally
does not include the compensation levels necessary to attract the services of
qualified and experienced subadvisers in today's market. As a result, the new
investment advisory agreement provides for higher advisory fees than the
previous investment advisory agreement. The table on page ___ describes the
compensation paid monthly by the Portfolio to MSIM under both the previous and
the new investment advisory agreements.
If the interim agreements go into effect, MSIM will serve as the
investment adviser for the Aggressive Growth Portfolio and T. Rowe Price will
serve as the subadviser for the Aggressive Growth Portfolio. T. Rowe Price has
expertise in mid-cap growth management. T. Rowe Price is located at 100 E.
21
<PAGE> 28
Pratt Street, Baltimore, Maryland, and provides portfolio management for
approximately $179 billion in assets. Assuming shareholder approval of the new
investment advisory agreement, T. Rowe Price will then serve as the subadviser.
This subadviser will provide investment advisory services that are intended to
result in superior performance for the Aggressive Growth Portfolio.
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the Portfolio. Wilshire does not participate in the selection of
the portfolio securities for the Portfolio or in any way participate in the
day-to-day management of the Portfolio or the Fund. Wilshire assists MSIM in
gathering data and performing the quantitative analysis necessary to identify
the styles and past performance of potential subadvisers. Wilshire also assists
MSIM in performing similar ongoing quantitative analysis of the performance of
the Portfolio's subadvisers and in determining whether changes in a subadviser
would be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Aggressive
Growth Portfolio, upon 60 days' notice given by the Board, by MSIM or by
majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
3.i. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
MANAGED PORTFOLIO
BACKGROUND INFORMATION
On November 30, 2000, SAC gave formal notice of its intent to resign,
effective on or around January 31, 2001, as investment adviser to the Managed
Portfolio, and the Board accepted the resignation. Assuming SAC's resignation
becomes effective, it will terminate the investment advisory agreement between
the Fund and SAC that became effective March 1, 1993. The investment advisory
agreement was last approved by shareholders on April 25, 1996, in connection
with an amendment authorizing SAC to provide advisory services to the Money
Market Portfolio. The terms of that previous investment advisory agreement
provided that SAC rendered investment advice to the Managed Portfolio, and
managed the investment and reinvestment of the Portfolio's assets. SAC is
located at One National Life Drive, Montpelier, Vermont 05604.
At a meeting of the Board held on November 3, 2000, the Board,
including a majority of independent trustees, approved an interim investment
advisory agreement between the Fund and MSIM and an interim subadvisory
agreement between MSIM and Fred Alger for the Managed Portfolio. The interim
investment advisory and subadvisory agreements will remain effective for a
period of 150 days following the termination of the previous investment advisory
agreement pending shareholder approval of the new investment advisory agreement.
During the interim period, MSIM will be paid 0.40% of the average daily net
assets of the Managed Portfolio, the same fee that SAC was paid under the
previous investment advisory agreement. Out of this fee, MSIM will then pay Fred
Alger its fee. A new investment advisory agreement between the Fund and MSIM
will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers for
the Managed Portfolio, will provide oversight for the subadvisers that are
hired, will negotiate the terms of subadvisory agreements, and will provide the
Fund's directors with
22
<PAGE> 29
regular reports as to the Portfolio's overall investment plan, schedule of
investments and other assets, and recent purchases and sales by the Portfolio.
The Managed Portfolio may be managed using a "manager of managers"
approach by which MSIM allocates the Portfolio's assets among one or more
subadvisers. The implementation of a "manager of managers" arrangement allows
the Portfolio to benefit from the expertise of a subadviser who specializes in
the investment strategies that are intended to assist the Portfolio in achieving
its investment goals. Given MSIM's experience in operating a "manager of
managers" approach to investment management, in particular in managing multiple
managers, and MSIM's experience with other Portfolios within the Fund, the Board
approved MSIM as the investment adviser to the Managed Portfolio on November 3,
2000. As part of implementing a "manager of managers" arrangement, the new
investment advisory agreement will cover MSIM's compensation for its oversight
services as well as the fees for the subadvisers who will be making the
day-to-day investment decisions. The previous investment advisory agreement with
SAC does not include compensation for the oversight services MSIM will be
performing under the "manager of managers" arrangement. Additionally, the
previous investment advisory agreement generally does not include the
compensation levels necessary to attract the services of qualified and
experienced subadvisers in today's market. As a result, the new investment
advisory agreement provides for higher advisory fees than the current agreement.
The table on page ___ describes the compensation paid monthly by the Portfolio
to MSIM under both the previous and the new investment advisory agreements.
If the interim agreements go into effect, MSIM will serve as the
investment adviser for the Managed Portfolio and Fred Alger will serve as the
subadviser for the Managed Portfolio. Assuming shareholder approval of the new
investment advisory agreement, Fred Alger will then serve as the subadviser.
Fred Alger is located at One World Trade Center, Suite 9333, New York, New York,
and provides portfolio management for approximately $21.2 billion in assets.
This subadviser will provide investment advisory services that are intended to
result in superior performance for the Managed Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Managed
Portfolio, upon 60 days' notice given by the Board, by MSIM or by majority vote
of the outstanding shares of the Portfolio, as defined below. Otherwise, the
investment advisory agreement will continue in force with respect to the
Portfolio so long as its continuance is approved at least annually by the Board
or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
3.j. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
BOND PORTFOLIO
BACKGROUND INFORMATION
On November 30, 2000, SAC gave formal notice of its intent to resign,
effective on or around January 31, 2001, as investment adviser to the Bond
Portfolio, and the Board accepted the resignation. Assuming SAC's resignation
becomes effective, it will terminate the investment advisory agreement between
the Fund and SAC that became effective March 1, 1993. The investment advisory
agreement was last approved by shareholders on April 25, 1996, in connection
with an amendment authorizing SAC to provide advisory services to the Money
Market Portfolio. The terms of the previous investment advisory agreement
provided that SAC rendered investment advice to the Bond Portfolio, and managed
the investment and reinvestment of the Portfolio's assets. SAC is located at One
National Life Drive, Montpelier, Vermont 05604.
At a meeting of the Board held on November 3, 2000, the Board,
including a majority of independent trustees, approved an interim investment
advisory agreement between the Fund and MSIM, and an interim subadvisory
agreement between MSIM and Western Asset for the Bond Portfolio. The
23
<PAGE> 30
interim investment advisory and subadvisory agreements will remain effective for
a period of 150 days following the termination of the previous investment
advisory agreement pending shareholder approval of the new investment advisory
agreement. During the interim period, MSIM will be paid 0.35% of the average
daily net assets of the Bond Portfolio, the same fee that SAC was paid under the
previous investment advisory agreement. Out of this fee, MSIM will then pay
Western Asset its fee. A new investment advisory agreement between the Fund and
MSIM will become effective upon shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide recommendations to
the Board regarding the hiring, termination, and replacement of subadvisers,
will provide oversight for the subadvisers that are hired, will negotiate the
terms of subadvisory agreements, and will provide the Fund's directors with
regular reports as to the Bond Portfolio's overall investment plan, schedule of
investments and other assets, and recent purchases and sales by the Portfolio.
The Bond Portfolio may be managed using a "manager of managers"
approach by which MSIM allocates the Portfolio's assets among one or more
subadvisers. The implementation of a "manager of managers" arrangement allows
the Portfolio to benefit from the expertise of a subadviser who specializes in
the investment strategies that are intended to assist the Portfolio in achieving
its investment goals. Given MSIM's experience in operating a "manager of
managers" approach to investment management, in particular managing multiple
managers, and MSIM's experience with other Portfolios within the Fund, the Board
approved MSIM as the investment adviser to the Bond Portfolio on November 3,
2000. As part of implementing a "manager of managers" arrangement, the new
investment advisory agreement will cover MSIM's compensation for its oversight
services as well as the fees for the subadvisers who will be making the
day-to-day investment decisions. The previous investment advisory agreement with
SAC does not include compensation for the oversight services MSIM will be
performing under the "manager of managers" arrangement. Additionally, the
previous investment advisory agreement generally does not include the
compensation levels necessary to attract the services of qualified and
experienced subadvisers in today's market. As a result, the new investment
advisory agreement provides for higher advisory fees than the previous
investment advisory agreement. The table on page ___ describes the compensation
paid monthly by the Portfolio to MSIM under both the previous and the new
investment advisory agreements.
If the interim agreements go into effect, MSIM will serve as the
investment adviser for the Bond Portfolio and Western Asset will serve as the
subadviser for the Bond Portfolio. Western Asset is located at 117 East Colorado
Boulevard, Pasadena, California, and provides portfolio management for
approximately $65.3 billion in assets. Assuming shareholder approval of the new
investment advisory agreement, Western Asset Management will then serve as the
subadviser. This subadviser will provide investment advisory services that are
intended to result in superior performance for the Bond Portfolio.
MSIM has retained Wilshire as an investment management consultant to
assist MSIM in identifying and evaluating the performance of potential
subadvisers for the Portfolio. Wilshire does not participate in the selection of
the portfolio securities for the Portfolio or in any way participate in the
day-to-day management of the Portfolio or the Fund. Wilshire assists MSIM in
gathering data and performing the quantitative analysis necessary to identify
the styles and past performance of potential subadvisers. Wilshire also assists
MSIM in performing similar ongoing quantitative analysis of the performance of
the Portfolio's subadvisers and in determining whether changes in a subadviser
would be desirable for the Portfolio.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Bond
Portfolio, upon 60 days' notice given by the Board, by MSIM or by majority vote
of the outstanding shares of the Portfolio, as defined below. Otherwise, the
investment advisory agreement will continue in force with respect to the
Portfolio so long as its continuance is approved at least annually by the Board
or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent
24
<PAGE> 31
members of the Board. For this purpose, "majority of the outstanding shares" is
defined in the 1940 Act as the lesser of: (a) 67% or more of the shares present
at the Meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (b) more than 50% of the total
outstanding shares of the Portfolio.
3.k. NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND MSIM FOR THE
MONEY MARKET PORTFOLIO
BACKGROUND INFORMATION
On November 30, 2000, SAC gave formal notice of its intent to resign
effective on or around January 31, 2001, as investment adviser to the Money
Market Portfolio, and the Board accepted the resignation. Assuming SAC's
resignation becomes effective, it will terminate the investment advisory
agreement between the Fund and SAC that originally became effective March 1,
1993. On February 26, 1996, the Board, including a majority of independent
directors, approved an amendment to that agreement to allow SAC to provide
investment advisory services to the Money Market Portfolio. The amended
agreement was last approved by shareholders on April 25, 1996, in connection
with an amendment authorizing SAC to provide advisory services to the Money
Market Portfolio. The terms of the previous investment advisory agreement
provided that SAC rendered investment advice to the Portfolio, and managed the
investment and reinvestment of the Portfolio's assets. The compensation paid by
the Fund to SAC is described in the table on page ___. SAC is located at One
National Life Drive, Montpelier, Vermont 05604.
At a meeting of the Board held on November 3, 2000, the Board,
including a majority of independent trustees, approved an interim investment
advisory agreement between the Fund and MSIM for the Money Market Portfolio. The
interim investment advisory agreement will remain effective for a period of 150
days following the termination of the previous investment advisory agreement
pending shareholder approval. During the interim period, MSIM will be paid 0.25%
of the average daily net assets of the Money Market Portfolio, the same fee that
SAC was paid under the previous investment advisory agreement. A new investment
advisory agreement between the Fund and MSIM will become effective upon
shareholder approval.
PROPOSED NEW INVESTMENT ADVISORY AGREEMENT
Under the new investment advisory agreement between the Fund and MSIM,
MSIM, subject to the supervision of the Board, will provide the Portfolio with
investment advice and will manage the investment and reinvestment of Portfolio
assets. MSIM also performs research services and evaluates statistical and
financial data relevant to the Portfolio's investment policies, and provides the
Fund's directors with regular reports as to the Portfolio's overall investment
plan, schedule of investments and other assets, and recent purchases and sales
by the Portfolio. The advisory fee paid by the Money Market Portfolio will
remain the same under the new investment advisory agreement.
The Money Market Portfolio will be managed directly by MSIM (although
the Money Market Portfolio may be managed in the future using a "manager of
managers" approach under which MSIM allocates the Portfolio's assets among one
or more subadvisers). MSIM will manage the investment operations of the Fund and
the composition of the Money Market Portfolio, including the purchase,
retention, and disposition of the investments, securities, and cash contained
therein, in accordance with the Portfolio's investment objectives and policies
as stated in the Fund's Declaration of Trust, Bylaws, Prospectus and SAI as from
time to time in effect. In connection therewith, MSIM will provide investment
research and supervision of the Portfolio's investments and conduct a continuous
program of investment evaluation and, if appropriate, sales and reinvestment of
the Portfolio's assets. MSIM will furnish to the Fund statistical information,
with respect to the investments that the Portfolio may hold or contemplate
purchasing, as the Fund may reasonably request. On MSIM's own initiative, MSIM
will apprise the Fund of important developments materially affecting the Money
Market Portfolio and will furnish the Fund from time to time such information as
MSIM believes may be appropriate for this purpose. MSIM will also implement all
purchases and sales of investments for the Money Market Portfolio in a manner
consistent
25
<PAGE> 32
with these policies. Because MSIM also will be providing investment advisory
services for the other Portfolios of the Fund, efficiency and consistency of
operations will be improved by approving MSIM as the investment adviser for the
Money Market Portfolio.
In regard to the Money Market Portfolio, MSIM employs a team approach
in managing the Portfolio. The management team is comprised of a lead portfolio
manager, an assistant portfolio manager, and other research analysts and
traders. This team includes members with one or more areas of expertise and each
member shares the responsibility for providing ideas, information and knowledge
in managing the Portfolios. The money market team is headed by Ms. Dina Welch
who will be assisted by Ms. Kathleen M. Larrabee. Ms. Welch and Ms. Larrabee
have over fifteen years investment experience and both have previously managed
the Money Market Portfolio. MSIM managed the Money Market Portfolio from
December 1985 through April 1996.
The new investment advisory agreement provides that it will terminate
automatically in the event of its assignment or, with respect to the Money
Market Portfolio, upon 60 days' notice given by the Board, by MSIM or by
majority vote of the outstanding shares of the Portfolio, as defined below.
Otherwise, the investment advisory agreement will continue in force with respect
to the Portfolio so long as its continuance is approved at least annually by the
Board or by the affirmative vote of a majority of the outstanding shares of the
Portfolio; provided that, in either case, it must also be approved by a majority
of the independent members of the Board. For this purpose, "majority of the
outstanding shares" is defined in the 1940 Act as the lesser of: (a) 67% or more
of the shares present at the Meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (b)
more than 50% of the total outstanding shares of the Portfolio.
EVALUATION BY THE BOARD
In evaluating the new investment advisory agreement between the Fund
and MSIM pursuant to which MSIM will provide investment advisory services to all
of the Portfolios, the Board reviewed materials furnished by MSIM and Wilshire.
Those materials included information regarding market analysis and investment
products currently available and information regarding MSIM and its personnel,
operations, and financial condition, as well as information regarding the
necessity of increasing the fees for the Growth, Aggressive Growth, Managed, and
Bond Portfolios. Representatives of MSIM met in person with the Board and
described in detail the background of the members of MSIM's portfolio management
team for the Fund. Representatives of MSIM also discussed with the Board the
investment decision making process and investment management style of MSIM. In
addition, the Board reviewed and discussed the terms and provisions of the
investment advisory agreement.
In approving the investment advisory agreement with MSIM, with its
increased advisory fee for certain Portfolios, the Board considered various
factors applicable to one or more individual Portfolios, including, in
particular:
1. putting in place a simpler organizational structure for advisory
services, based on a single adviser, that could achieve efficiencies and be more
readily understandable by contract owners;
2. the potential benefits to contract owners of the "manager of
managers" advisory approach, currently followed for a number of Portfolios, and
the additional services and costs that such an approach would involve, as
discussed above;
3. the positive effect that using the "manager of managers" approach
and a broader mix of investment options could have on stimulating greater effort
by the sales forces of participating insurance companies to sell variable
contracts, and attracting existing contract owners to choose the Fund over
competing investment options, thereby stabilizing and increasing cash flows into
the Portfolios;
4. the expectation that SAC's termination of its relationship with the
Fund, and the anticipated withdrawal of assets invested in Portfolios under
variable contracts issued by NLIC would have no material adverse effect on the
Portfolios, due to the relatively small amounts of such assets in relation to
total assets;
26
<PAGE> 33
5. the fact that PMLIC, prior to SAC's service, had served as
investment adviser to the Bond and Money Market Portfolios and, therefore, has
the expertise necessary to assume management of these Portfolios through its
wholly-owned subsidiary MSIM;
6. the level of the proposed advisory fees as compared to an
independently prepared average of advisory fees paid by funds with similar
investment objectives;
7. the interface among the investment advisory agreement and the Fund's
existing and new administrative services agreements and the fact that PMLIC has
entered into a Reimbursement Agreement with the Fund to reimburse the Fund for
expenses exceeding specified levels; and
8. the fact that, while the Board is not responsible for the fees and
charges deducted under the variable contracts permitting allocations to the
Fund, participating insurance companies are required to represent that the fees
and charges, in the aggregate, are reasonable in relation to the services
rendered, expenses expected to be incurred, and the risks assumed by the
insurance companies.
Under the previous investment advisory agreement, SAC was responsible
for securities selection and providing certain administration services. Under
the proposed new investment advisory agreement, MSIM, in addition to providing
certain administrative services, also will be responsible for reviewing on an
ongoing basis the performance of the subadvisers managing each Portfolio,
determining when a current subadviser should be terminated and selecting a
successor subadviser, and paying the subadvisers from MSIM's advisory fee.
In evaluating the advisory fees under the new agreements, the Board
received information concerning the current level of advisory fees for funds of
comparable size and investment objectives. This information is summarized below.
<TABLE>
<CAPTION>
======================================== ======================== ========================== ================
PORTFOLIO TILLINGHAST CATEGORY(1) TILLINGHAST AVERAGE(2) PROPOSED FEE(3)
======================================== ======================== ========================== ================
<S> <C> <C> <C>
All Pro Large Cap Growth Portfolio Growth 70 70
---------------------------------------- ------------------------ -------------------------- ----------------
All Pro Large Cap Value Portfolio Growth and Income 58 70
---------------------------------------- ------------------------ -------------------------- ----------------
All Pro Small Cap Growth Portfolio Aggressive Growth 76 90
---------------------------------------- ------------------------ -------------------------- ----------------
All Pro Small Cap Value Portfolio N/A N/A 90
---------------------------------------- ------------------------ -------------------------- ----------------
Growth Portfolio Growth 70 75
---------------------------------------- ------------------------ -------------------------- ----------------
Equity 500 Index Portfolio N/A N/A 24
---------------------------------------- ------------------------ -------------------------- ----------------
International Portfolio International Equity 83 75
---------------------------------------- ------------------------ -------------------------- ----------------
Aggressive Growth Portfolio Aggressive Growth 76 75
---------------------------------------- ------------------------ -------------------------- ----------------
Managed Portfolio Balanced 64 55
---------------------------------------- ------------------------ -------------------------- ----------------
Bond Portfolio Corporate Bond 53 40
---------------------------------------- ------------------------ -------------------------- ----------------
Money Market Portfolio Money Market 35 25
---------------------------------------- ------------------------ -------------------------- ----------------
</TABLE>
(1) Tillinghast, Towers and Perrin Variable Annuity Database Investment Type
(2) Average investment advisory fees at June 30, 2000, based on Tillinghast,
Towers and Perrin Database covering approximately 3,100 funds in seven
categories ranging from 140 to 972 funds per category.
(3) Certain Portfolios have investment advisory fee breakpoints. In those
cases, the table above shows the fee prior to the first breakpoint, if
applicable. Please see the table on page ___ for a complete description
of the investment advisory fees for those Portfolios.
After due consideration, and with the advice of independent counsel,
the Board approved the appointment of MSIM as the investment adviser for the
Growth, Aggressive Growth, Managed, Bond and Money Market Portfolios, and MSIM's
continuing service as the investment adviser to the All Pro Large Cap Growth,
All Pro Large Cap Value, All Pro Small Cap Growth, All Pro Small Cap Value,
Equity 500 Index, and International Portfolios.
27
<PAGE> 34
ADDITIONAL INFORMATION
MSIM is a registered investment adviser and is also an indirect
wholly-owned subsidiary of PMLIC. Providentmutual Holding Company ("PHC"), a
Pennsylvania corporation, owns all of the voting securities of MSIM. PMLIC, in
turn, owns all of the voting securities of PHC. MSIM, PMLIC, and PHC are located
at 1000 Chesterbrook Boulevard, Berwyn, Pennsylvania 19312-1181. None of the
directors of the Fund has or had any material interest in any material
transactions since the beginning of the most recently completed fiscal year to
which MSIM or any of MSIM's affiliates is or was a party. The following table
lists the principal executive officers and the directors of MSIM. Instances
where these individuals are also officers or directors of the Fund are
indicated.
<TABLE>
<CAPTION>
============================== ================================ ==================== ======================
NAME AND ADDRESS OF
PRINCIPAL EXECUTIVE OFFICERS POSITION HELD WITH POSITION, IF ANY,
AND DIRECTORS OF MSIM PRINCIPAL OCCUPATION MSIM HELD WITH FUND
============================== ================================ ==================== ======================
<S> <C> <C> <C>
Sarah C. Lange Senior Vice President and President and Vice President
1000 Chesterbrook Boulevard Chief Investment Officer of Director
Berwyn, Pennsylvania PMLIC
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Scott V. Carney Vice President and Actuary of Vice President None
1000 Chesterbrook Boulevard PMLIC
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Rosanne Gatta Vice President and Treasurer Vice President and President
1000 Chesterbrook Boulevard of PMLIC Director
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
James Kestner Vice President - Securities Vice President and Vice President
1000 Chesterbrook Boulevard Investments for PMLIC Director
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Anthony T. Giampietro Assistant Treasurer for PMLIC Treasurer Treasurer
1000 Chesterbrook Boulevard
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Todd R. Miller Assistant Vice President, None Assistant Vice
1000 Chesterbrook Boulevard Financial Reporting for PMLIC President, Financial
Berwyn, Pennsylvania Reporting Officer
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
James Bernstein Assistant General Counsel for Compliance Compliance Officer,
1000 Chesterbrook Boulevard PMLIC Officer, Assistant Secretary
Berwyn, Pennsylvania Secretary
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Robert W. Kloss President and Chief Executive Director Director
1000 Chesterbrook Boulevard Officer of PMLIC
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
</TABLE>
28
<PAGE> 35
<TABLE>
<CAPTION>
============================== ================================ ==================== ======================
NAME AND ADDRESS OF
PRINCIPAL EXECUTIVE OFFICERS POSITION HELD WITH POSITION, IF ANY,
AND DIRECTORS OF MSIM PRINCIPAL OCCUPATION MSIM HELD WITH FUND
============================== ================================ ==================== ======================
<S> <C> <C> <C>
Mary Lynn Finnelli Executive Vice President of Director Vice President
1000 Chesterbrook Boulevard PMLIC
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
Alan F. Hinkle Executive Vice President of Director Vice President
1000 Chesterbrook Boulevard PMLIC
Berwyn, Pennsylvania
19312-1181
------------------------------ -------------------------------- -------------------- ----------------------
</TABLE>
TABLE SHOWING CHANGE IN INVESTMENT ADVISORY FEES
<TABLE>
<CAPTION>
============================ =================== =================== ======================= ================
INVESTMENT FEES THAT
PREVIOUS MAXIMUM ADVISORY FEES WOULD HAVE
ANNUAL RATE (AS % PAID IN 1999 NEW FEE SCHEDULE (AS BEEN PAID
OF AVERAGE DAILY UNDER PREVIOUS % OF AVERAGE DAILY UNDER NEW FEE
PORTFOLIO NET ASSETS) FEE SCHEDULE NET ASSETS) SCHEDULE
============================ =================== =================== ======================= ================
<S> <C> <C> <C> <C>
All Pro Large Cap Growth 0.70% $174,315 0.70% on first $200 Same
Portfolio million
0.65% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
All Pro Large Cap Value 0.70% $145,234 0.70% on first $200 Same
Portfolio million
0.65% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
All Pro Small Cap Growth 0.90% $180,903 0.90% on first $200 Same
Portfolio million
0.85% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
All Pro Small Cap Value 0.90% $85,907 0.90% on first $200 Same
Portfolio million
0.85% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
Growth Portfolio 0.50% $1,003,377 0.75% on first $200 $2,345,149
million
0.70% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
Equity 500 Index Portfolio(1) Not Applicable Not Applicable 0.24% Same
---------------------------- ------------------- ------------------- ----------------------- ----------------
International Portfolio 0.75% $568,324 0.75% on first $500 Same
million
0.70% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
Aggressive Growth Portfolio 0.50% $225,914 0.75% on first $200 $422,576
million
0.70% on excess
---------------------------- ------------------- ------------------- ----------------------- ----------------
Managed Portfolio 0.40% $296,660 0.55% $407,437
---------------------------- ------------------- ------------------- ----------------------- ----------------
Bond Portfolio 0.35% $126,876 0.40% $147,767
---------------------------- ------------------- ------------------- ----------------------- ----------------
Money Market Portfolio 0.25% $261,012 Same Same
---------------------------- ------------------- ------------------- ----------------------- ----------------
</TABLE>
1 Equity 500 Index Portfolio commenced operation on February 2, 2000.
The percentage increase in the fees that would have been paid under
the new fee schedule over the investment advisory fees paid in 1999 under the
previous fee schedule is 133.73% for the Growth Portfolio, 87.05% for the
Aggressive Growth Portfolio, 37.34% for the Managed Portfolio, and 16.47% for
the Bond Portfolio. The above fees do not include the 0.10% annual fee that the
Fund will pay for certain
29
<PAGE> 36
administrative services that PMLIC will provide pursuant to a new administration
agreement between PMLIC and the Fund. These administrative services include, for
example, (i) preparing and distributing all required reports, proxy materials,
and other communications to shareholders, (ii) providing clerical, secretarial
and bookkeeping services, office supplies and office space, and (iii) preparing
and distributing materials for Board meetings. These services are not provided
for in either the Fund's Administration and Accounting Services Agreement or
Transfer Agency Services Agreement with PFPC, Inc., the Fund's Custodian
Services Agreement with PFPC Trust Company, or the Fund's proposed investment
advisory agreements with MSIM. PMLIC has been providing these services in the
past on an uncompensated basis.
BROKERAGE COMMISSIONS ON PORTFOLIO TRANSACTIONS
The new investment advisory agreement provides that, to the extent
permitted by the policy guidelines set forth in the Fund's current registration
statement, MSIM is authorized to consider, in the selection of brokers and
dealers to execute portfolio transactions, not only the available prices and
rates of brokerage commissions, but also other relevant factors, which may
include, without limitation, the execution capabilities of these brokers and
dealers, research, custody, and other services provided by these brokers and
dealers which MSIM believes will enhance its general portfolio management
capabilities, the size of the transaction, the difficulty of execution, the
operational facilities of these brokers and dealers, the risk to such a broker
or dealer of positioning a block of securities, and the overall quality of
brokerage and research services provided by these brokers and dealers.
BOARD OF DIRECTORS' RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE VOTING
INSTRUCTIONS TO VOTE FOR APPROVAL OF THE PROPOSED NEW INVESTMENT ADVISORY
AGREEMENT BETWEEN THE FUND AND MSIM FOR THE ALL OF THE PORTFOLIOS.
PROPOSAL 4. PERMIT MSIM TO ENTER INTO AND MATERIALLY AMEND SUBADVISORY
AGREEMENTS FOR CERTAIN PORTFOLIOS WITHOUT SHAREHOLDER APPROVAL
(GROWTH PORTFOLIO, EQUITY 500 INDEX PORTFOLIO, INTERNATIONAL
PORTFOLIO, AGGRESSIVE GROWTH PORTFOLIO, MANAGED PORTFOLIO, BOND
PORTFOLIO, AND MONEY MARKET PORTFOLIO)
At a meeting of the Board held on November 3, 2000, the Board approved
a plan to permit MSIM, as the investment adviser for all of the Portfolios, upon
shareholder approval of Proposal 3, to enter into and to amend materially
subadvisory agreements without shareholder approval. THE PURPOSE OF THE PLAN IS
TO INCREASE EFFICIENCY AND TO CUT THE COSTS ASSOCIATED WITH OBTAINING
SHAREHOLDER APPROVAL. To proceed with the plan, we need approval by the
Portfolios' shareholders. Each Portfolio's shareholders vote separately.
Upon shareholder approval of Proposal 3, MSIM will be the investment
adviser to all of the Portfolios. As a result, MSIM will have overall
responsibility for the general management and day-to-day operations of the
Portfolios, but may employ one or more subadvisers to make the investment
decisions for the Portfolios. The Fund proposes that MSIM, subject to approval
of the Board, be permitted to enter into and/or to amend materially subadvisory
agreements on behalf of the Fund without obtaining the prior approval of a
majority of the outstanding voting securities of the Fund, as is otherwise
required by Section 15 of the 1940 Act.
This proposed arrangement would enable the Fund to operate more
efficiently because MSIM would be able to make these kinds of subadvisory
changes from time to time without the expenses and delays associated with
obtaining shareholder approval of the changes. If shareholders approve the
arrangement, the Board will consider and would approve any subadvisory changes
that MSIM proposes under the arrangement to ensure that the changes are in the
best interests of each Portfolio and its shareholders.
30
<PAGE> 37
MSIM and the Fund were issued an exemptive order by the SEC on April 7,
1999, for an exemption (the "Exemption") from certain provisions of the 1940 Act
that would otherwise require MSIM to obtain formal shareholder approval prior to
engaging and entering into subadvisory agreements with subadvisers. The relief
is based on the conditions set forth in the Exemption that, among other things:
(1) MSIM will select, monitor, evaluate, and allocate assets to the subadvisers
and oversee the subadvisers' compliance with the relevant Portfolio's investment
objective, policies, and restrictions; (2) before a Portfolio may rely on the
Exemption, the Exemption initially must be approved by the shareholders of the
Portfolio operating under the Exemption; (3) the Fund will provide to
shareholders certain information about a new subadviser; (4) the Fund will
disclose in its prospectus the existence, substance, and effect of the
Exemption; and (5) the Board, including a majority of the independent directors,
must approve each subadvisory agreement in the manner required under the 1940
Act. In addition, the Exemption does not permit MSIM to enter into an agreement
with a subadviser that is an affiliate of MSIM, the Fund, or a Portfolio (other
than by reason as serving as subadviser to the Portfolio) or to change the
subadvisory fee to be paid to an affiliated subadviser, without shareholder
approval. Any changes to the investment advisory agreement between the Fund and
MSIM would still require shareholder approval.
One of the SEC's conditions to implementing this relief requires that
the proposed arrangement be approved initially by a majority of the Fund's
outstanding voting securities. The Board is taking this opportunity to seek
shareholder approval of the proposed arrangement regarding the management of the
Growth, Equity 500 Index, International, Aggressive Growth, Managed, Bond, and
Money Market Portfolios.
Under the new investment advisory agreement proposed by Proposal 3,
MSIM will supervise the purchase and sale of all of the Portfolios' investments
and will oversee the day-to-day operations of the Portfolios. This new
investment advisory agreement expressly permits MSIM to appoint subadvisers for
the purpose of providing investment management services as set forth in a
subadvisory agreement. Under an existing investment advisory agreement with the
Fund effective May 1, 1998, MSIM is currently the investment adviser to the four
existing All Pro Portfolios of the Fund. Pursuant to this agreement, MSIM
employs subadvisers for the All Pro Portfolios and is responsible for
recommending to the Board the hiring, termination, and replacement of
subadvisers for the All Pro Portfolios; supervising and evaluating the
performance of subadvisers for the All Pro Portfolios; and negotiating and, as
circumstances warrant, renegotiating the terms and conditions of any subadvisory
agreement (including the fees payable thereunder). MSIM, therefore, has
experience operating a "manager of managers" arrangement in conjunction with
Board approval. MSIM selects subadvisers based on a continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to a particular investment style. Short-term performance is not by
itself a significant factor in selecting or terminating investment subadvisers,
and, therefore, MSIM does not anticipate frequent changes in investment
subadvisers. Criteria for employment of subadvisers includes, but is not limited
to, proven discipline and thoroughness in pursuit of stated investment
objectives, above-average performance over the long-term and an ability to
preserve capital in declining markets, and the expertise and level of service of
the subadvisers' staff and organization. Subadvisers may have different
investment styles and security selection disciplines.
REASONS FOR PROPOSAL. The Board believes that allowing MSIM to
negotiate subadvisory arrangements for the Growth, Equity 500 Index,
International, Aggressive Growth, Managed, Bond, and Money Market Portfolios
without incurring the expenses or delays of obtaining shareholder approval is in
the best interests of the Portfolio's shareholders and will allow each Portfolio
to operate more efficiently. Currently, in order for MSIM to appoint a
subadviser or to amend materially a subadvisory agreement, the Fund must hold a
special shareholder meeting and solicit votes from a Portfolio's shareholders.
Without having to hold shareholder meetings, the Board would be able to act
faster and with less expense to appoint a subadviser when the Board and MSIM
believe that the appointment would benefit the Portfolio and its shareholders.
Furthermore, the Board believes that it is appropriate to allow MSIM to
negotiate and renegotiate subadvisory arrangements for the Portfolios in light
of MSIM's experience and expertise.
Moreover, the Board will provide oversight of the subadviser selection
process to help ensure that shareholders' interests are protected if MSIM
selects a new subadviser or modifies a subadvisory
31
<PAGE> 38
agreement. The Board, including a majority of the independent directors, will
evaluate and approve all new subadvisory agreements, as well as any
modifications to all subadvisory agreements. In its review, the Board will
analyze all factors that it considers to be relevant to the determination,
including the nature, quality, and scope of services provided by the
subadvisers. The Board believes that its review will ensure that MSIM continues
to act in the best interest of each Portfolio and its shareholders.
EVALUATION BY THE BOARD
In evaluating the proposed changes, the Board reviewed materials
relating to the proposed arrangement, and had the opportunity to ask questions
and request further information regarding the arrangement. Based on its
consideration of the discussion above and other information that the Board
deemed relevant, and with the advice of independent counsel, the Board
unanimously voted to approve the plan to permit MSIM to enter into and to amend
materially subadvisory agreements for the Growth, Equity 500 Index,
International, Aggressive Growth, Managed, Bond, and Money Market Portfolios
without shareholder approval.
BOARD OF DIRECTORS' RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE VOTING
INSTRUCTIONS TO VOTE FOR APPROVAL OF THE ARRANGEMENT TO PERMIT MSIM TO ENTER
INTO AND TO AMEND MATERIALLY SUBADVISORY AGREEMENTS FOR THE GROWTH, EQUITY 500
INDEX, INTERNATIONAL, AGGRESSIVE GROWTH, MANAGED, BOND, AND MONEY MARKET
PORTFOLIOS WITHOUT SHAREHOLDER APPROVAL.
OTHER INFORMATION
SHAREHOLDER PROPOSALS. As a general matter, the Fund does not hold
regular annual meetings of shareholders. Any shareholder who wishes to submit a
proposal for consideration at a meeting of the Fund should send such proposal to
the Fund at 103 Bellevue Parkway, Wilmington, Delaware 19809. Rules promulgated
by the SEC require that to be considered for presentation at a shareholders'
meeting, a shareholder's proposal must, among other things, be received at the
offices of the Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
INQUIRIES. Shareholders or owners may make inquiries concerning these
proposals by contacting Shareholder Communications Corporation, a division of
Georgeson & Company, at (877) 518-9414.
ACCOUNTING AND ADMINISTRATIVE SERVICES. PFPC, Inc. provides certain
accounting and administrative services to the Fund pursuant to an agreement
between PFPC, Inc. and the Fund. PFPC, Inc., located at 103 Bellevue Parkway,
Wilmington, Delaware 19809, is a wholly-owned subsidiary of PNC Bank. PMLIC will
provide certain other administrative services to the Fund pursuant to an
administration agreement between PMLIC and the Fund.
PRINCIPAL UNDERWRITER. 1717 Capital Management Company ("1717") serves,
without compensation from the Fund, as principal underwriter to the Fund
pursuant to an agreement between 1717 and the Fund. 1717, located at 300
Continental Drive, Newark, Delaware 19713, is a wholly-owned subsidiary of
Provident Mutual Holding Company, which, in turn, is a wholly-owned subsidiary
of PMLIC.
32
<PAGE> 39
APPENDIX A
AGREEMENT AND PLAN OF
REORGANIZATION, REDOMESTICATION AND PRO-RATA DISTRIBUTION
<PAGE> 40
AGREEMENT AND PLAN OF
REORGANIZATION, REDOMESTICATION AND PRO-RATA DISTRIBUTION
AGREEMENT AND PLAN OF REORGANIZATION, REDOMESTICATION AND PRO-RATA
DISTRIBUTION dated as of ________ __, 2000 (the "Agreement"), between the Market
Street Fund, Inc., a Maryland corporation having an office at 103 Bellevue
Parkway, Wilmington, Delaware, 19809 (the "Fund") and the Market Street Fund, a
Delaware business trust having an office at 103 Bellevue Parkway, Wilmington,
Delaware, 19809 (the "Trust").
WHEREAS, the Board of Directors of the Fund and the Board of Trustees
of the Trust have determined that it is in the best interests of the Fund and
the Trust, respectively, for the assets of the Fund to be acquired by the Trust
pursuant to this Agreement and in accordance with the applicable laws of the
States of Maryland and of Delaware; and
WHEREAS, the parties desire to enter into a plan of exchange which
would constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended;
NOW THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. PLAN OF EXCHANGE.
(a) Subject to the terms and conditions set forth herein, on
the Exchange Date (as defined herein), the Fund shall assign, transfer
and convey the assets of each of its portfolios, excluding the Sentinel
Growth Portfolio (collectively, the "Fund Portfolios" and each
individually, a "Fund Portfolio"), including all securities and cash
held by each Fund Portfolio (subject to the liabilities of each such
Fund Portfolio) to a corresponding portfolio of the Trust
(collectively, the "Trust Portfolios" and each individually, a "Trust
Portfolio"), and each such Trust Portfolio shall acquire all of the
assets of each corresponding Fund Portfolio (subject to the liabilities
of each such Fund Portfolio) in exchange for full and fractional shares
of beneficial interest of such Trust Portfolio, $.001 par value per
share (the "Portfolio Shares"), to be issued by the Trust, having, in
the case of each Trust Portfolio, an aggregate net asset value equal to
the value of the net assets of the corresponding Fund Portfolio
acquired. The value of the assets of each of the Fund Portfolios and
the net asset value per share of the Portfolio Shares of each of the
Trust Portfolios shall be determined as of the Valuation Date (as
defined herein) in accordance with the procedures for determining the
value of each Fund Portfolio's assets set forth in the Trust
Portfolio's organizational document and the then-current prospectus and
statement of additional information for each Fund Portfolio that forms
a part of the Trust Portfolio's Registration Statement on Form N-1A
(the "Registration Statement").
In lieu of delivering certificates for the Portfolio Shares,
the Trust shall credit the Portfolio Shares to the Fund's account on
the share record books of the Trust and shall deliver a confirmation
thereof to the Fund. The Fund shall then deliver written instructions
to the Trust's transfer agent to establish accounts for the
shareholders on the share record books relating to each of the Fund
Portfolios. Notwithstanding anything expressly or by implication set
forth herein (but without limiting the rights of the governing Boards
of the Fund and Trust under Section 8 hereof), this Agreement, and the
transactions contemplated herein, shall be deemed to apply to each Fund
Portfolio and its corresponding Trust Portfolio as to which the
condition precedent set forth in Section 6(a) hereof shall have been
satisfied, and shall not apply to any Fund Portfolio or its
corresponding Trust Portfolio as to which such condition precedent
shall not have been satisfied.
(b) Delivery of the assets of each of the Fund Portfolios to
be transferred shall be made not later than the next business day
following the Valuation Date (the "Exchange Date"). Assets transferred
shall be delivered to Provident Financial Processing Corporation, the
Trust's custodian (the "Custodian"), for the account of the Trust and
the Trust Portfolios, with all securities not in bearer or book entry
form duly endorsed, or accompanied by duly executed separate
assignments or stock powers, in proper form for transfer, with
signatures guaranteed, and with all necessary stock transfer
<PAGE> 41
stamps, sufficient to transfer good and marketable title thereto
(including all accrued interest and dividends and rights pertaining
thereto) to the Custodian for the account of the Trust and the Trust
Portfolios free and clear of all liens, encumbrances, rights,
restrictions and claims. All cash delivered shall be in the form of
immediately available funds payable to the order of the Custodian for
the account of the Trust and the Trust Portfolios. All assets delivered
to the Custodian as provided herein shall be allocated by the Trust to
each Trust Portfolio corresponding to the Fund Portfolio from which, or
on the account of which, the assets were transferred.
(c) The Fund will pay or cause to be paid to the Trust any
interest received on or after the Exchange Date with respect to assets
transferred from any Fund Portfolio to the corresponding Trust
Portfolio hereunder and to the Trust any distributions, rights or other
assets received by the Fund after the Exchange Date as distributions on
or with respect to the securities transferred from any Fund Portfolio
to the corresponding Trust Portfolio hereunder, and the Trust shall
allocate any such distributions, rights or other assets to the
appropriate Trust Portfolio. All such assets shall be deemed included
in assets transferred to the Fund Portfolios on the Exchange Date and
shall not be separately valued.
(d) The Valuation Date shall be ___________ __, 2000, or such
earlier or later date as may be mutually agreed upon by the parties.
(e) As soon as practicable after the Exchange Date, the Fund
shall distribute all of the Shares of each of the Trust Portfolios
received by it among the shareholders of each corresponding Fund
Portfolio in proportion to the number of shares each such shareholder
holds in each such Fund Portfolio and, upon the effecting of such a
distribution on behalf of all of the Fund Portfolios, the Fund will
dissolve and terminate. After the Exchange Date, any Fund Portfolio
which has been the subject of the exchange transactions on such
Exchange Date shall not conduct any business except in connection with
its dissolution and termination.
2. THE FUND'S REPRESENTATIONS AND WARRANTIES. The Fund represents and
warrants to and agrees with the Trust as follows:
(a) The Fund is duly organized, validly existing and in good
standing under the laws of the state of Maryland and has power to own
all of its properties and assets and, subject to the approval of its
shareholders as contemplated hereby, to carry out this Agreement.
(b) The Fund is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment
company, and such registration has not been revoked or rescinded and is
in full force and effect.
(c) Except as shown on the audited financial statements of the
Fund for its most recently completed fiscal period and as incurred in
the ordinary course of the Fund's and each Fund Portfolio's business
since then, neither the Fund nor any Fund Portfolio has any known
liabilities of a material amount, contingent or otherwise, and there
are no material legal, administrative or other proceedings pending or
threatened against the Fund or any Fund Portfolio.
(d) On the Exchange Date, the Fund will have full right, power
and authority to sell, assign, transfer and deliver the assets to be
transferred by it hereunder.
3. THE TRUST'S REPRESENTATIONS AND WARRANTIES. The Trust represents and
warrants to and agrees with the Fund as follows:
(a) The Trust is a business trust duly organized, validly
existing and in good standing under the laws of the State of Delaware
and has power to carry on its business as it is now being conducted and
to carry out this Agreement.
2
<PAGE> 42
(b) The Trust is registered or will register as an open-end
management investment company and adopt the Registration Statement of
the Fund, for purposes of the Securities Act of 1933, as amended,
(the"1933 Act") and the 1940 Act.
(c) Neither the Trust nor any Trust Portfolio has any known
liabilities of a material amount, contingent or otherwise, and there
are no material legal, administrative or other proceedings pending or
threatened against the Trust or any Trust Portfolio.
(d) At the Exchange Date, the Portfolio Shares to be issued to
the Fund (the only Portfolio Shares to be issued as of the Exchange
Date, except for the initial capital, if any, of the Trust) will have
been duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid
and non-assessable by the Trust. No Trust Portfolio or Trust Portfolio
shareholder will have any preemptive right of subscription or purchase
in respect thereof.
4. THE TRUST'S CONDITIONS PRECEDENT. The obligations of the Trust
hereunder shall be subject to the following conditions:
(a) The Fund shall have furnished to the Trust a statement of
the Fund's assets, including a list of securities owned by the Fund
with their respective tax costs and values determined as provided in
Section 1 hereof, all as of the Valuation Date.
(b) As of the Exchange Date, all representations and
warranties of the Fund made in this Agreement shall be true and correct
as if made at and as of such date, and the Fund shall have complied
with all the agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to such date.
(c) For the Fund as a whole, a vote approving this Agreement
and the transactions and exchange contemplated hereby shall have been
adopted by the vote required by applicable law.
5. THE FUND'S CONDITIONS PRECEDENT. The obligations of the Fund
hereunder shall be subject to the condition that as of the Exchange Date all
representations and warranties of the Trust made in the Agreement shall be true
and correct as if made at and as of such date, and that the Trust shall have
complied with all of the agreements and satisfied all the conditions on its part
to be performed or satisfied at or prior to such date.
6. THE TRUST'S AND THE FUND'S CONDITIONS PRECEDENT. The obligations of
both the Trust and the Fund hereunder as to any particular Fund Portfolio and
its corresponding Trust Portfolio shall be subject to the following conditions:
(a) This Agreement and the transactions contemplated hereby
shall have been approved by the vote required by applicable law.
(b) The receipt of such authority, including "no-action"
letters and orders from the Securities and Exchange Commission (the
"Commission") or state securities commissions, as may be necessary to
permit the parties to carry out the transaction contemplated by this
Agreement shall have been received.
(c) The Trust's adoption of the Registration Statement on Form
N-1A under the 1933 Act and the 1940 Act shall have become effective,
and any post-effective amendments to such Registration Statement as are
determined by the Trustees to be necessary and appropriate, shall have
been filed with the Commission and shall have become effective.
(d) The Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act nor instituted nor
threatened to institute any proceeding seeking to enjoin consummation
of the reorganization transactions contemplated hereby under Section
25(c) of the 1940
3
<PAGE> 43
Act and no other action, suit or other proceeding shall be threatened
or pending before any court or governmental agency which seeks to
restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein; provided,
however, that at any time prior to the Exchange Date, any of the
foregoing conditions in this Section 6 may be waived by the parties if,
in the judgment of the parties, such waiver will not have a material
adverse effect on the benefits intended under this Agreement to the
shareholders of the Fund.
7. INDEMNIFICATION. The Trust hereby agrees with the Fund and each
Director of the Fund: (i) to indemnify each Director of the Fund against all
liabilities and expenses referred to in the indemnification provisions of the
Fund's organizational documents, to the extent provided therein, incurred by any
Director of the Fund; and (ii) in addition to the indemnification provided in
(i) above, to indemnify each Director of the Fund against all liabilities and
expenses and pay the same as they arise and become due, without any exception,
limitation or requirement of approval by any person, and without any right to
require repayment thereof by any such Trustee (unless such Trustee has had the
same repaid to him or her) based upon any subsequent or final disposition or
findings made in connection therewith or otherwise, if such action, suit or
other proceeding involves such Trustee's participation in authorizing or
permitting or acquiescing in, directly or indirectly, by action or inaction, the
making of any distribution in any manner of all or any assets of the Fund
without making provision for the payment of any liabilities of any kind, fixed
or contingent, of the Fund, which liabilities were not actually and consciously
personally known to such Trustee to exist at the time of such Trustee's
participation in so authorizing or permitting or acquiescing in the making of
any such distribution.
8. TERMINATION OF AGREEMENT. As to any Fund Portfolio and its
corresponding Trust Portfolio, this Agreement and the transactions contemplated
hereby may be terminated and abandoned by resolution of the Board of the Fund or
the Board of the Trust, at any time prior to the Exchange Date (and
notwithstanding any vote of the shareholders of the Fund Portfolio) if
circumstances should develop that, in the opinion of either the Board of the
Fund or the Board of the Trust, make proceeding with this Agreement inadvisable.
In making any such determination as to any Fund Portfolio and its corresponding
Trust Portfolio, the respective Boards may consider, among other factors,
whether approval has been rendered by shareholders of all (or only some) of the
Fund Portfolios. As to any Fund Portfolio and its corresponding Trust Portfolio,
if this Agreement is terminated and the exchange contemplated hereby is
abandoned pursuant to the provisions of this Section 8, this Agreement shall
become void and have no effect, without any liability on the part of any party
hereto or the Trustees, officers or shareholders of the Trust or the Trustees,
officers or shareholders of the Fund, in respect of this Agreement.
9. WAIVER AND AMENDMENTS. At any time prior to the Exchange Date, any
of the conditions set forth in Section 4 may be waived by the Board of the Fund,
and any of the conditions set forth in Section 5 may be waived by the Board of
the Trust, if, in the judgment of the waiving party, such waiver will not have a
material adverse effect on the benefits intended under this Agreement to the
shareholders of the Fund or the shareholders of the Trust, as the case may be.
In addition, prior to the Exchange Date, any provision of this Agreement may be
amended or modified by the Boards of the Fund and Trust if such amendment or
modification would not have a material adverse effect upon the benefits intended
under this Agreement and would be consistent with the best interests of
shareholders.
10. NO SURVIVAL OF REPRESENTATIONS. None of the representations and
warranties included or provided for herein shall survive consummation of the
transactions contemplated hereby.
4
<PAGE> 44
11. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of Delaware, without giving effect to principles of
conflict of laws; provided, however, that the due authorization, execution and
delivery of this Agreement, in the case of the Fund, shall be governed and
construed in accordance with the laws of the state of Maryland without giving
effect to principles of conflict of laws.
12. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which, when executed and delivered, shall be deemed to be an original.
IN WITNESS WHEREOF, the Fund and the Trust have caused this Agreement
and Plan of Reorganization, Redomestication, and Pro-Rata Distribution to be
executed as of the date above first written.
<TABLE>
<S> <C>
Market Street Fund, Inc.
ATTEST: By:
---------------------------- ---------------------------------
Title:
Market Street Fund
ATTEST: By:
---------------------------- ---------------------------------
Title:
</TABLE>
5
<PAGE> 45
APPENDIX B
INVESTMENT ADVISORY AGREEMENT
<PAGE> 46
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT (the "Agreement"), by and between
MARKET STREET INVESTMENT MANAGEMENT COMPANY, a Pennsylvania corporation (the
"Adviser"), and MARKET STREET FUND, a Delaware business trust (the "Fund"), made
as of this ___ day of _____________, 200__, which is the date that Market Street
Fund, Inc., a Maryland corporation, reorganizes and redomesticates into the
Fund.
WHEREAS, the Fund is a series-type, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), that currently consists of eleven investment portfolios (each, a
"Portfolio"), each such Portfolio having its own investment objective(s); and
WHEREAS; the Fund issues a separate series of shares for each Portfolio, which
shares represent fractional undivided interests in the Portfolio; and
WHEREAS, the Adviser is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Fund desires to retain the Adviser to provide or to arrange to
provide overall investment management of the Fund's Portfolios, in the manner
and on the terms and conditions set forth in this Agreement; and
WHEREAS, the Adviser is willing to provide or to arrange to provide, investment
advisory services to the Fund and the Fund's Portfolios on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the covenants
contained in this Agreement, the Fund and Adviser hereby agree as follows:
1. APPOINTMENT OF ADVISER. The Fund hereby appoints the Adviser to provide
investment advisory services for the Portfolios specified in an appendix to this
Agreement (each, a "Portfolio"), as this appendix may be amended from time to
time under this Agreement ("Appendix A"). Pursuant to this Agreement and subject
to the oversight and supervision by Fund's Board of Trustees (the "Board"), the
Adviser shall manage the investment and reinvestment, or arrange for the
investment and reinvestment of each Portfolio's assets.
2. ACCEPTANCE OF APPOINTMENT BY ADVISER. The Adviser hereby accepts the
appointment by the Fund in the foregoing capacity and agrees, at the Adviser's
own expense, to render the services set forth herein and to provide the office
space, furnishings, equipment, and personnel required by the Adviser to perform
these services on the terms and for the compensation provided in this Agreement.
<PAGE> 47
3. SERVICES TO BE PROVIDED BY ADVISER. In particular, the Adviser shall
furnish continuously an investment program for the Portfolio and shall determine
from time to time in the Adviser's discretion the securities and other
investments to be purchased or sold or exchanged and what portions of the
Portfolio shall be held in various securities, cash, or other investments. In
this connection, the Adviser shall provide the Fund's Board and officers, with
any reports and documentation as the Adviser, and the Fund's Board and officers
shall reasonably request regarding the Adviser's management of the Portfolio
assets. The Adviser shall not delegate any of the Adviser's duties under this
Agreement to any other Adviser without the consent and approval of the Fund's
Board and a majority of those trustees who are not parties to this Agreement or
"interested persons" of any party; provided, that, in the event the Adviser is
authorized to so delegate, the Adviser shall retain overall responsibility for
these delegated powers and functions and any and all obligations and liabilities
in connection therewith.
4. COMPLIANCE BY ADVISER WITH PORTFOLIO POLICIES AND APPLICABLE LAW. The
Adviser shall carry out the Adviser's responsibilities under this Agreement in
compliance with: (a) a Portfolio's investment objective, policies, and
restrictions, as set forth in the Fund's current registration statement, as
amended from time to time; (b) any policies or directives as the Fund's Board
may from time to time establish or issue and communicate to the Adviser in
writing; and (c) applicable law and related regulations. The Fund shall promptly
notify the Adviser in writing of changes to (a) or (b) above and shall notify
the Adviser in writing of changes to (c) above promptly after the Fund becomes
aware of these changes.
5. ADVISER'S DUTIES REGARDING PORTFOLIO TRANSACTIONS.
(A) PLACEMENT OF ORDERS. The Adviser shall take all actions the Adviser
considers necessary to implement the investment policies of the Portfolio,
and, in particular, to place all orders for the purchase or sale of
securities or other investments for the Portfolio with brokers or dealers
the Adviser selects, and, to that end, the Adviser is authorized as the
Fund's agent to give instructions to the Fund's custodian as to deliveries
of securities or other investments and payments of cash for a Portfolio's
account. In connection with the selection of brokers or dealers and the
placement of purchase and sale orders, the Adviser is directed at all times
to seek to obtain best execution and price within the policy guidelines
determined by the Fund's Board and set forth in the Fund's current
registration statement.
(B) SELECTION OF BROKERS AND DEALERS. To the extent permitted by the policy
guidelines set forth in the Fund's current registration statement, in the
selection of brokers and dealers to execute portfolio transactions, the
Adviser is authorized to consider not only the available prices and rates
of brokerage commissions but also other relevant factors, which may
include, without limitation: the execution capabilities of the brokers and
dealers; the research, custody, and other services provided by the brokers
and dealers that the Adviser believes will enhance the Adviser's general
portfolio management capabilities; the size of the transaction; the
difficulty of execution; the operational facilities of these brokers and
dealers; the risk to this broker or dealer of positioning a block of
securities; and the overall
2
<PAGE> 48
quality of brokerage and research services provided by these brokers and
dealers. In connection with the foregoing, the Adviser is specifically
authorized to pay those brokers and dealers who provide brokerage and
research services to the Adviser, a higher commission than that charged by
other brokers and dealers if the Adviser determines in good faith that the
amount of the commission is reasonable in relation to the value of these
services in terms of either the particular transaction or in terms of the
Adviser's overall responsibilities with respect to the Portfolio and to any
other client accounts or portfolios that the Adviser advises. The execution
of these transactions shall not be considered to represent an unlawful
breach of any duty created by this Agreement or otherwise.
(C) SOFT DOLLAR ARRANGEMENTS. On an ongoing basis, but not less often than
annually, the Adviser shall identify and provide a written description to
the Fund of all "soft dollar" arrangements that the Adviser maintains with
respect to the Portfolio or with brokers or dealers that execute
transactions for the Portfolio. Prior to the commencement of the active
management of the Portfolio, and periodically thereafter, but not less
often than annually, the Adviser shall provide the Fund with a written
description of all arrangements with third parties and other individuals,
entities, brokers, or money management firms that have or may receive or
share in the payment of fees for services in connection with securing or
continuing this Agreement.
(D) AGGREGATED TRANSACTIONS. The Adviser also is authorized to aggregate
purchase and sale orders for securities held (or to be held) in the
Portfolio with similar orders being made on the same day for other client
accounts or portfolios that the Adviser manages. When an order is so
aggregated: (a) the actual prices applicable to the aggregated transaction
will be averaged, and the Portfolio and each other account or portfolio
participating in the aggregated transaction shall be treated as having
purchased or sold the Portfolio's portion of the securities at this average
price; and (b) all transaction costs incurred in effecting the aggregated
transaction shall be shared on a pro-rata basis among the accounts or
portfolios (including the Portfolio) participating in the transaction. When
recommending or effecting a transaction in a particular security or
investment for more than one client account or portfolio (including the
Portfolio), the Adviser may allocate the recommendations or transactions
among all accounts and portfolios for whom the recommendation is made or
transaction is effected on a basis that the Adviser considers equitable.
The Adviser recognizes that in some cases this procedure may adversely
affect the size of the position obtainable for the Portfolio.
6. NON-EXCLUSIVITY OF ADVISER'S SERVICES. The Adviser's services under this
Agreement are not exclusive. The Adviser may provide the same or similar
services to other clients. The Adviser acknowledges that, except when
transactions for multiple clients are aggregated, transactions in a specific
security or other investment may not be recommended or executed at the same time
or price for all client accounts or portfolios (including the Portfolio) for
which that security or investment is recommended or executed. This Agreement
does not require the Adviser to give priority to the Portfolio over other client
accounts or portfolios. The Adviser
3
<PAGE> 49
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund or the Portfolio or otherwise be deemed an agent
of the Fund or the Portfolio.
7. DELEGATION OF PROXY VOTING RIGHTS. The Fund delegates the Fund's
discretionary authority to exercise voting rights with respect to the securities
and other investments in the Portfolio to the Adviser. The Adviser shall
exercise these voting rights unless and until the Adviser revokes this
delegation in writing. The Adviser may revoke this delegation at any time
without cause. The Adviser shall maintain and preserve a record, in an easily
accessible place for a period of not less than three (3) years, of the Adviser's
voting procedures, and of the Adviser's actual votes, and the Adviser shall
supply this record to the Adviser, or any authorized representative of the
Adviser, upon the written request of the Adviser or the Adviser's authorized
representative, as appropriate.
8. AFFILIATED BROKERS. The Adviser or any of the Adviser's affiliates may act
as broker in connection with the purchase or sale of securities or other
investments for the Portfolio, subject to: (a) the requirement that the Adviser
seek to obtain best execution and price within the policy guidelines determined
by the Fund's Board and set forth in the Fund's current registration statement;
(b) the provisions of the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); (c) the provisions of the Securities Exchange Act of 1934, as
amended, including, but not limited to, Section 11(a) thereof; and (d) other
applicable provisions of law. These brokerage services are not within the scope
of the duties of the Adviser under this Agreement. Subject to the requirements
of applicable law and any procedures adopted by Fund's Board, the Adviser or the
Adviser's affiliate may receive brokerage commissions, fees, or other
remuneration from the Portfolio or the Fund for these services in addition to
the Adviser's fees for services under this Agreement.
9. CUSTODY. Nothing in this Agreement shall require the Adviser to take or
receive physical possession of cash, securities, or other investments of the
Portfolio.
10. REGISTRATION OF ADVISER. The Adviser is registered as an investment
adviser with the U.S. Securities and Exchange Commission under the Advisers Act.
The Adviser shall remain so registered throughout the term of this Agreement and
shall notify the Adviser immediately if the Adviser ceases to be so registered
as an investment adviser.
11. REPRESENTATIONS AND COVENANTS OF ADVISER.
(A) The Adviser: (a) is duly organized and validly existing under
Pennsylvania law with the power to own and possess the Adviser's
assets and carry on the Adviser's business as this business is now
being conducted; (b) has the authority to enter into and perform the
services contemplated by this Agreement; (c) is not prohibited by the
Investment Company Act of 1940, as amended (the "1940 Act"), or the
Advisers Act from performing the services contemplated by this
Agreement; (d) has met, and shall continue to seek to meet for the
duration of this Agreement, any other applicable federal or state
requirements, or the applicable requirements of any regulatory or
industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this
4
<PAGE> 50
Agreement; and (e) shall promptly notify the Fund of the occurrence of
any event that would disqualify the Adviser from serving as an
investment adviser to an investment company pursuant to Section 9(a)
of the 1940 Act.
(B) The Adviser shall be responsible for the management of each Portfolio
in accordance with the prospectus and statement of additional
information, with respect to the Portfolio, and in compliance with the
requirements applicable a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") and, further, to the extent applicable for only the Portfolios
that are insurance-dedicated investment portfolios, in compliance with
the diversification requirements for variable annuity, life insurance,
or endowment contracts, Code Section 817(h) and United States Treasury
Regulation Section 1.817-5, each as may be amended from time to time;
and, furthermore, the Adviser shall promptly inform the Fund if any
information in the prospectus or statement of additional information,
with respect to the Portfolio, or if any action relating to the
Adviser or the Adviser's services to the Portfolio is (or will become)
inaccurate, incomplete, or no longer compliant with Code Section
817(h) or Section 1.817-5, supra, if applicable.
12. REPRESENTATIONS AND COVENANTS OF THE FUND. The Fund: (a) is duly organized
and validly existing under Delaware law with the power to own and possess the
Fund's assets and carry on the Fund's business as this business is now being
conducted; (b) has the authority to enter into and perform the services
contemplated by this Agreement; and (c) represents that the Fund is (and during
the term of this Agreement, will remain) registered as an open-end management
investment company under the 1940 Act and that the Fund's shares representing an
interest in the Portfolio are (and during the term of this Agreement will
remain) registered under the Securities Act of 1933 and under any applicable
state securities laws.
13. ADVISER CODE OF ETHICS. The Adviser certifies that the Adviser has adopted
a written code of ethics complying with the requirements of Rule 17j-1 under the
1940 Act, and that the Adviser has instituted procedures reasonably necessary to
prevent Access Persons from violating the Adviser's code of ethics. The Adviser
will provide the Fund with a copy of that code, together with evidence of the
code's adoption. Within twenty (20) days of the end of each calendar quarter
during which this Agreement remains in effect, the president or a vice president
of the Adviser shall certify to the Fund that the Adviser has complied with the
requirements of Rule 17j-1 during the previous quarter and that there have been
no violations of the Adviser's code of ethics or, if a violation has occurred,
that appropriate action has been taken in response to the violation; provided,
that, no less frequently than annually, the appropriate officer of the Adviser
shall furnish a written report to the Adviser that complies with the
requirements of Rule 17j-1 with respect to these reports regarding issues,
material violations, and any related sanctions in connection with the
administration of the code of ethics, or as otherwise required pursuant to Rule
17j-1. Upon written request of the Fund, the Adviser shall permit
representatives of the Fund to examine the reports (or summaries of the reports)
required to be made to the Adviser by Rule 17j-1(d)(1) and other records
evidencing enforcement of the code of ethics.
5
<PAGE> 51
14. FEE PROVISIONS.
(A) FEE. For the services rendered, the facilities furnished, and the
expenses assumed by the Adviser, the Fund shall pay the Adviser quarterly
fees, in arrears, based on the combined net assets of all Portfolios
managed by the Adviser, calculated daily at the annual rates specified with
respect to a Portfolio in an appendix to this Agreement, as this appendix
may be amended from time to time under this Agreement ("Appendix B"). The
Adviser's fee shall be accrued daily at 1/365th of the applicable annual
rate set forth in Appendix B. For the purpose of accruing compensation, the
net assets of a Portfolio shall be determined in the manner and on the
dates set forth in the Fund's current prospectus, and, on days on which the
net assets are not so determined, the net asset value computation to be
used shall be as determined on the immediately preceding day on which the
net assets were determined.
(B) SPECIAL FEE PROVISIONS. In the event of termination of this Agreement
with respect to a Portfolio, all compensation due through the date of
termination will be calculated on a pro-rated basis through the date of
termination and paid within thirty (30) business days of the date of
termination. During any period when the determination of net asset value is
suspended, the net asset value of the Portfolio as of the last business day
prior to the suspension shall for this purpose be deemed to be the net
asset value at the close of each succeeding business day until the
Portfolio's net asset value is again determined.
15. RECORDS.
(A) MAINTENANCE OF RECORDS. The Adviser hereby undertakes and agrees to
maintain, in the form and for the period required by Rule 31a-2 under the
1940 Act, all records relating to the Portfolio's investments that are
required to be maintained by the Fund pursuant to the requirements of
paragraphs (b)(5), (b)(6), (b)(7), (b)(9), (b)(10), and (f) of Rule 31a-1
under the 1940 Act.
(B) OWNERSHIP OF RECORDS. The Adviser agrees that all books and records
which the Adviser maintains for the Portfolio or the Fund are the Fund's
property and further agrees to surrender promptly to the Fund any books,
records, or information upon the Fund's request; provided, however, that
the Adviser may retain copies of the records. All the requested books and
records shall be made available, within five (5) business days of a written
request, to the Fund's accountants or auditors during regular business
hours at the Adviser's offices. The Fund or the Fund's authorized
representatives shall have the right to copy any records in the possession
of the Adviser that pertain to the Portfolio or the Fund. These books,
records, information, or reports shall be made available to properly
authorized government representatives consistent with state and federal law
and/or regulations. In the event of the termination of this Agreement, all
these books, records, or other information shall be returned to the Fund.
The Adviser agrees that the policies and procedures the Adviser has
established for managing the Portfolio, including, but not limited to, all
policies and procedures designed to
6
<PAGE> 52
ensure compliance with federal and state regulations governing the
Adviser/client relationship and management and operation of the Portfolio,
shall be made available for inspection by the Fund or either of their
authorized representatives not less frequently than annually.
16. CONFIDENTIALITY.
(A) NON-DISCLOSURE BY ADVISER. The Adviser agrees that the Adviser will not
disclose or use any records or confidential information obtained pursuant
to this Agreement in any manner whatsoever, except as authorized in this
Agreement or specifically by the Fund, or if this disclosure is required by
federal or state regulatory authorities.
(B) NON-DISCLOSURE EXCEPTIONS. The Adviser may disclose the investment
performance of the Portfolio and the Portfolio; provided, that the
disclosure does not reveal the identity of the Portfolio, or the Fund. The
Adviser may, however, disclose that the Fund and the Portfolio are the
Fund's clients; provided, that the disclosure does not reveal the
investment performance or the composition of the Portfolio.
17. LIMITATION OF LIABILITY OF ADVISER. In the absence of willful misfeasance,
bad faith, or gross negligence on the part of the Adviser or the Adviser's
officers, directors, or employees, or reckless disregard by the Adviser of the
Adviser's duties under this Agreement (together, "disabling conduct"), the
Adviser shall not be liable to the Portfolio or the Fund, or to any shareholder
of the Portfolio for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding, or sale of any security, except to the extent otherwise
provided in Section 36(b) of the 1940 Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services; provided, that with respect to the Adviser's responsibilities pursuant
to Subchapter M of the Code and Code Section 817(h) as described in Section
11(b) hereof, the Adviser agrees to indemnify and hold harmless the Fund, and
each of its directors or trustees and officers acting within the scope of his or
her responsibilities (the "Indemnified Parties"), for losses, damages,
liabilities, or expenses (including reasonable attorney fees) that arise as a
result of any failure by the Fund or its Portfolios to comply with the
diversification requirements specified in that Section 11(b), except to the
extent that these losses, damages, liabilities, or expenses (including
reasonable attorney fees) arise as a result from the gross negligence, bad faith
or willful misconduct of the Fund's Board, or any member thereof, in connection
with the Fund's operations.
18. EFFECTIVENESS. This Agreement shall not become effective with respect to a
Portfolio until this Agreement is approved by the Fund's Board, including a
majority of trustees who are not parties to this Agreement or "interested
persons" of any party to this Agreement, and, to the extent required by law, a
majority of the outstanding shares of the Portfolio. Subject to receipt of all
necessary approvals, this Agreement shall be effective as of the date, and for
the term, provided in Appendix A with respect to a Portfolio.
7
<PAGE> 53
19. TERMINATION. This Agreement may be terminated at any time with respect to
a Portfolio without the payment of any penalty, by the Fund's Board, or by vote
of a majority of the outstanding shares of the Portfolio, on sixty (60) days
written notice to the Adviser or by the Adviser, on sixty (60) days written
notice to the other. This Agreement shall automatically terminate in the event
of this Agreement's assignment.
20. AMENDMENT. This Agreement may be amended with respect to a Portfolio in
writing by the parties only if the amendment is specifically approved by: (a) a
majority of those trustees who are not parties to this Agreement or "interested
persons" of any party cast in person at a meeting called for the purpose of
voting on the Agreement's approval; and (b) if required by applicable law, the
vote of a majority of outstanding shares of the affected Portfolio(s).
21. DEFINITIONS. The terms "assignment," "affiliated person," and "interested
person," when used in this Agreement, shall have the respective meanings
specified in Section 2(a) the 1940 Act. The term "majority of the outstanding
shares" means the lesser of (a) sixty-seven percent (67%) or more of the shares
present at a meeting if more than fifty percent (50%) of these shares are
present or represented by proxy or (b) more than fifty percent (50%) of the
outstanding shares.
24. GOVERNING LAW. This Agreement shall be construed in accordance with
Delaware law and applicable provisions of the Advisers Act and 1940 Act.
25. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby.
8
<PAGE> 54
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
Market Street Investment Management Company
By:
----------------------------------------
Name: Sarah C. Lange
Title: President
ATTEST:
--------------------------
Market Street Fund
By:
----------------------------------------
Name: Rosanne Gatta
Title: President
ATTEST:
--------------------------
9
<PAGE> 55
APPENDIX A
TO THE INVESTMENT ADVISORY AGREEMENT BETWEEN MARKET STREET
INVESTMENT MANAGEMENT COMPANY AND
MARKET STREET FUND
PORTFOLIO(S) EFFECTIVE DATE AND TERM
------------ -----------------------
All Pro Broad Equity Portfolio The effective date of this Agreement
All Pro Large Cap Growth Portfolio with respect to this Portfolio shall be
All Pro Large Cap Value Portfolio the ___ day of _____________, 200__. The
All Pro Small Cap Growth Portfolio term of this Agreement shall continue
All Pro Small Cap Value Portfolio for two (2) years and shall thereafter
Equity 500 Index Portfolio continue in effect from year to year so
International Portfolio long as the Agreement's continuance is
Balanced Portfolio specifically approved at least annually
Money Market Portfolio by: (a) the Fund's Board, or by the vote
Mid Cap Growth Portfolio of a majority of the outstanding shares
Bond Portfolio of the Portfolio, and (b) a majority of
those trustees who are not parties to
this Agreement or interested persons of
any party cast in person at a meeting
called for the purpose of voting on the
Agreement's approval.
Market Street Investment Management Company
By: Date:
---------------------------------------- --------------------
Name: Sarah C. Lange
Title: President
Market Street Fund
By: Date:
---------------------------------------- --------------------
Name: Rosanne Gatta
Title: President
A-1
<PAGE> 56
APPENDIX B
TO THE INVESTMENT ADVISORY AGREEMENT BETWEEN MARKET STREET
INVESTMENT MANAGEMENT COMPANY AND
MARKET STREET FUND
PORTFOLIOS FEE
---------- ---
(as a %age of the average daily net assets,
calculated as described in Section 14
of this Agreement)
All Pro Broad Equity 0.75% on the first $200 million, and 0.70%
on assets in excess of $200 million
All Pro Large Cap Growth 0.70% on the first $200 million, and 0.65%
on assets in excess of $200 million
All Pro Large Cap Value 0.70% on the first $200 million, and 0.65%
on assets in excess of $200 million
All Pro Small Cap Growth 0.90% on the first $200 million, and 0.85%
on assets in excess of $200 million
All Pro Small Cap Value 0.90% on the first $200 million, and 0.85%
on assets in excess of $200 million
Equity 500 Index 0.24%
International 0.75% on the first $500 million, and 0.70%
on assets in excess of $500 million
Mid Cap Growth 0.75% on the first $200 million, and 0.70%
on assets excess of $200 million
Balanced 0.55%
Bond 0.40%
Money Market 0.25%
Market Street Investment Management Company
By: Date:
---------------------------------------- --------------------
Name: Sarah C. Lange
Title: President
Market Street Fund
By: Date:
---------------------------------------- --------------------
Name: Rosanne Gatta
Title: President
B-1
<PAGE> 57
[INSURANCE COMPANY
NAME PRINTS HERE]
Please detach card at perforation before mailing.
[PORTFOLIO NAME PRINTS HERE] PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
January 12, 2001
This proxy is solicited on behalf of the Board of Directors of Market Street
Fund, Inc. The undersigned hereby appoints James Bernstein, Rosanne Gatta, and
Sarah Lange, or any one or more of them, proxies, with full power of
substitution, to vote as designated on the reverse side of this proxy all of the
shares that the undersigned is entitled to vote at the Special Meeting of
Shareholders to be held on January 12, 2001, and at any adjournments thereof.
NOTE: Please sign exactly as your name appears on this proxy. When signing in
a fiduciary capacity, such as executor, administrator, trustee,
attorney, guardian, etc, please so indicate. Corporate and partnership
proxies should be signed by an authorized person indicating the
person's title.
Date __________________, 200__
PLEASE SIGN, DATE, AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE, OR MAIL TO:
PROXY TABULATOR, P.O. BOX 227,
RANDOLPH, MA 02368-9816
-----------------------------------------
Signature(s) (Title(s), if applicable)
<PAGE> 58
Please fold and detach card at perforation. Return bottom portion only.
VOTING INSTRUCTIONS ARE SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR EACH PROPOSAL. THE SHARES REPRESENTED HEREBY
WILL BE VOTED BY THE PROXIES IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
CONTRACT OWNER. IF NO DIRECTION IS GIVEN, THIS INSTRUCTION FORM WILL BE VOTED
FOR EACH APPLICABLE PROPOSAL.
Please vote by filling in the appropriate boxes below.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. For all Portfolios. Approve the reorganization of the Fund into a Delaware / / / / / / 1.
business trust.
2. Only contract owners invested in the Growth, Aggressive Growth and Managed / / / / / / 2.
Portfolios vote on this proposal. Change the investment approaches of and
rename certain Portfolios and change the investment objective of the Growth
Portfolio as described in the proxy statement.
3. For all Portfolios. Approve a new investment advisory agreement between the / / / / / / 3.
Fund and Market Street Investment Management Company ("MSIM").
4. Only contract owners invested in the Growth, Equity 500 Index, International, / / / / / / 4.
Aggressive Growth, Managed, Bond and Money Market Portfolios vote on this
proposal. Permit MSIM to enter into and materially amend subadvisory agreements
for certain portfolios without shareholder approval as described in the proxy
statement.
5. In their discretion, the proxies are authorized to vote upon such other business / / / / / / 5.
as may be properly brought before the meeting or any adjournments thereof.
</TABLE>
